Darling set to cut growth and raise borrowing

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By Sumeet Desai

LONDON (Reuters) - British finance minister Alistair Darling looks set to cut growth forecasts and ramp up borrowing in his first budget on Wednesday as the economy faces its most challenging test in more than a decade.

In the job since last June, Darling has had a tough time dealing 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.

Business has also reacted angrily to his plans for capital gains tax reform and imposing a levy on rich foreigners living in Britain. The ruling Labour Party is now trailing in the polls ahead of an election expected some time next year.

But worsening public finances mean Darling’s hands are tied on offering much in the way of sweeteners to an electorate growing disenchanted with his and Prime Minister Gordon Brown’s economic stewardship.

He may delay a 2 pence hike in fuel duty planned for April to autumn, a government source told Reuters on Friday, given oil prices topping $100 a barrel are adding to the consumer burden. Such a move has cost some 400 million pounds in the past.

While the scope for much largesse beyond that is limited, Darling looks sure to find some cash for tackling child poverty and increasing winter fuel allowances .....continued below

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The 54-year old Scot will almost certainly blame the global downturn for this year’s slowdown when he gets up in parliament at 1230 GMT and is expected to nudge down his growth forecast for this year from the current 2.0 percent to 2.5 percent range.

"The gloomier economic outlook suggests the Treasury’s 2008/09 and 2009/10 borrowing forecasts will be raised significantly," said Philip Shaw, chief economist at Investec.

Analysts polled by Reuters poll on Tuesday expected the Treasury to revise up the net borrowing forecast to 40 billion pounds in the next fiscal year and 39 billion in 2009/10 -- from the 36 billion and 31 billion pound projections made in October.

But Darling is unlikely to countenance such a huge change to his projections and the actual adjustment in borrowing forecasts will probably be smaller.

He is sure to argue that letting borrowing rise in a downturn is absolutely necessary and is expected to pencil in a fiscal tightening of around 5 billion pounds in a couple of years to get the public finances back on track.

GREEN BUDGET

Few analysts are predicting any substantive measures in this budget as the cuts in corporation tax and income tax to come into effect in April were already announced by Brown, when he was finance minister, last year.

Treasury officials have told Reuters the budget will have a "strong green theme". Darling is considering slapping on extra duty and a showroom tax of some 1,000 pounds on gas-guzzling cars, according to one government source.

There will be similar penalties and incentives applied to company car fleets to make them more environmentally-friendly and there could be some changes to aviation duty.

Darling will set out a timetable warning retailers that they will be forced to charge for plastic bags unless they slash the number handed out to shoppers.

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