British economy to shrink at fastest pace since 1945

Britain's budget deficit will soar to a record £175 billion as the economy shrinks at its fastest pace since World War II this year, finance minister Alistair Darling said yesterday.

To help bridge the yawning gap, Mr Darling will slap a new 50 per cent tax rate on the highest earners but the government will still have to issue a record £220 billion of government bonds, way above even the highest forecasts.

With an election due by June 2010 and the Labour Party way behind in the polls, Mr Darling forecast the economy would start growing again next year, by as much as 1.5 per cent, and pledged several billion pounds of spending to support industry and jobs. But analysts were sceptical that recovery could come so soon and even more so of forecasts that the economy would in two years start steaming ahead at a rate of 3.5 per cent to bring the public finances back on a sustainable path.

The International Monetary Fund was more pessimistic, forecasting yesterday that Britain would contract by 4.1 per cent this year, and in stark contrast to Mr Darling's forecast of a quick return to growth, drop a further 0.4 per cent in 2010.

With tax revenues and collapsing and social security payments soaring and unemployment rate at an 11-year high, Conservative leader David Cameron harked back to the years of effort by Labour to build a reputation for economic competence - something it was perceived to lack in the past.

"As of today any claim they have ever made to economic competence is dead, over, finished," Mr Cameron said. "He is planning to borrow £348 billion over the next two years. That is more than every previous government put together."

Meanwhile, Britain announced plans yesterday to boost the ailing car industry with a scheme to give motorists a £2,000 discount on purchasing a new vehicle when they trade in one more than ten years old.

Finance minister Alistair Darling said in his annual budget the government would contribute £1,000 to a new purchase, with the remainder funded by car companies.

The move, which follows the introduction of similar schemes across Europe, was given a mixed reception as car manufacturers had hoped the government would finance the entire subsidy.

The Automobile Association also said it was disappointed by the government's plans to increase fuel duty by two pence a litre in September while the Royal Automobile Club Foundation said the scheme would consign a lot of "perfectly good, and relatively clean, vehicles to the dustbin."

Britain's finance minister Alistair Darling also raised duty on alcohol and tobacco yesterday, prompting the pub industry to say he had signed the "death warrant" for thousands of bars. Alcohol duties in the UK will go up by two per cent and there will be an increase in tobacco duty of two per cent.