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UK's Darling to issue gloomiest budget in generation

British finance minister Alistair Darling will deliver the gloomiest budget in a generation, with borrowing at a record high and the economy shrinking at its fastest pace since World War Two.

But with an election due by June 2010 and the ruling Labour Party sinking in the polls, Darling will stress the economy should turn around by the end of the year and looks sure to offer some headline-grabbing sweeteners.

Despite little wiggle room on the public finances - the deficit is expected to hit Ł160 billion ($233.1 billion) this year - government sources have told Reuters to expect at least Ł3.5 billion of new spending to boost jobs and industry.

There could be more as Darling's boss, Prime Minister Gordon Brown, has been for months telling countries around the world to pour cash into their recession-hit economies and specialized in the surprise giveaway when he ran the Treasury for a decade

“We've got to plan for the future, to invest in Britain's future to ensure that we can take advantage of the recovery when it comes, and it will come,” Darling, said in a video clip posted on the Treasury's website.

But the immediate outlook is grim. Figures out on Wednesday showed another 73,700 people signed on for unemployment benefit last month. The wider jobless measure stood at 6.7% in February, the highest since the year Labour came to power in 1997.

Darling, who took over from Brown two years ago, will have to admit that the economy, ravaged by a global credit crunch, will probably shrink by 3%-3.5% this year, three times worse than what he predicted 5 months ago.

Given the scale of the downturn, which is being mirrored around the world, the budget deficit is easily expected to exceed 10% of GDP this year and the next.

More figures on Wednesday showed borrowing in the fiscal year just ended stood at a record Ł90 billion, raising the risk gilt issuance this year could top the Ł180 billion predicted by market-makers in a Reuters poll last week.

“This suggests the Chancellor will be unveiling some truly terrible estimates for borrowing this year and next, which will keep bond markets very nervous,” said James Knightley, economist at ING.

Sterling and government bonds fell after the figures were released and Darling will be keen to convince financial markets the budget can be brought to heel at some future date.

The Treasury said on Tuesday it can find another Ł10 billion of “efficiency savings” by 2013 on top of the Ł5 billion it penciled in last year.

There has been also been some speculation the Treasury may scrap the higher rate of tax relief for pension contributions. It has already said people earning over Ł150,000 will be taxed at a new 45% rate from 2011.

Officials say there are also likely to be further measures to crack down on tax avoidance, including perhaps naming and shaming persistent offenders.

The big focus, however, will be getting the economy moving again and getting people into jobs - Bank of England policymaker David Blanchflower has predicted 3 million people could be out of work by the end of the year.

The budget is expected to put Ł2 billion into initiatives to boost employment. A further Ł1 billion will go toward helping the construction industry and Ł500 million to environmental projects.

“Darling will vow never to return to the day where a whole generation of people found themselves abandoned to a future on the scrapheap,” a government source said.

A holiday on duty for homes costing below 175,000 pounds due to expire in September may be extended until the end of the year and the government has also been thinking about a “scrappage” scheme where new car buyers can get rebates for their old ones. (Reuters)