Enlarge imageBy Sumeet Desai
LONDON (Reuters) - Chancellor Alistair Darling looks set to lower growth forecasts and ratchet up borrowing next week but Treasury officials insist his first budget would lock in stability at a time of economic turmoil.
In the job since last June, Darling has already had to contend with a global credit crunch and Britain’s first bank run in more than a century, which resulted in the government having to nationalise the country’s fifth-biggest mortgage lender.
The economy is now slowing and the ruling Labour Party’s popularity has slumped in the polls, increasing pressure on Darling to come up with some crowd-pleasing measures beyond the tax cuts that have already been announced.
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Few government watchers expect any big giveaways this year given the state of the public finances and a relatively neutral budget is likely.
Growth forecasts for this year will have to be downgraded a little. In October, Darling predicted the economy would expand by 2.0 to 2.5 percent in 2008.
Most commentators are now forecasting something below 2 percent so Darling may be forced to revise his own estimate to 1.75 to 2.25 percent and blame a global slowdown.
"Chancellor Alistair Darling’s first Budget, on March 12, is likely to have little good news and plenty of bad," said Michael Saunders, economist at Citigroup.
He is expected to say that despite the credit crisis, Britain is better-placed than most other major economies to withstand the storm and be able to boast that the economy has grown in every single quarter since Labour came to power a decade ago.
The global context will also give Darling the excuse to raise government borrowing at a time when some commentators have been calling for tighter fiscal policy to bring the public finances on a more sustainable footing.
Darling will argue that a slowing economy requires flexibility and borrowing will have to rise to accommodate that.
With public finances seemingly poised to overshoot the government’s own target, some 5 to 8 billion pounds could easily be added on the borrowing totals.
"The operation of the automatic stabilizers should be welcomed on the grounds that it’s likely to mean that the slowdown is less marked than otherwise," said Robert Barrie, economist at Credit Suisse.
GREEN MAN
While the scope for giveaways is limited, Darling will still be able to confirm already-announced cuts in headline income and corporation tax rates, due to come into effect from April.
There is also likely to be something for increasing winter fuel allowances for pensioners and a drive to alleviate child poverty as the government is in danger of missing its targets of halving it by 2010 and getting rid of it by 2020.
Darling, however, looks set to resist calls to scrap a planned hike in fuel duty.
Gas-guzzling vehicles are also likely to face further tax hikes as Darling tries to burnish his green credentials. Some incentives for energy-saving measures such as loft insulation may also get a look-in.
There has also been much speculation that Darling will raise taxes on alcohol as the government tries to crack down on binge drinking.
He is also expected to press ahead with plans to impose an annual levy on so-called non domiciled foreigners if they stay in the country for more than 7 years despite a high profile campaign by financial professionals to force a U-turn.
(Reporting by Sumeet Desai, editing by Mike Peacock)
