Alistair Darling faces budget climbdown

Britain's budget deficit this year is likely to be double the government's forecast, a leading think-tank said yesterday, suggesting Chancellor Alistair Darling's inaugural budget next month will be a tricky affair.

The National Institute of Economic and Social Research reckons disappointing tax receipts will push Britain's public sector deficit for 2007/08 above £16 billion. In his pre-budget report in October, Mr Darling predicted it would be just over eight billion.

"The state of public finances after a period of strong economic growth is a worry," it said.

In order to meet its rule of borrowing only to invest over the economic cycle, NIESR calculates the government would need to raise taxes by nine billion pounds over the next three years.

However, it suggests tax rises are not appropriate given the risks facing the economy and the government would be better off reforming its fiscal rules.

Mr Darling will present the annual budget on March 12. Economic surveys are painting an increasingly bleak outlook as tighter credit conditions exacerbate a consumer-led slowdown.

With no room for giveaways, Mr Darling must be hoping the Bank of England can shore up the economy by cutting interest rates.

NIESR reckons interest rates are likely to be cut from 5.5 per cent to 4.75 per cent this year. However, it acknowledges that the near term inflation outlook has deteriorated and predicts inflation will rise to 2.6 per cent in the third quarter.