Wednesday, UK's Chancellor of Exchequer Alistair Darling announced his second budget statement. The government lowered its gross domestic product estimate and raised the income tax.
Darling now sees a contraction of 3.5% in 2009, the worst since the Second World War. In November, the government had forecast a shrinkage of nearly 1.2%. The economy shrank 1.6% in the fourth quarter of 2008 and the Chancellor sees similar amount of decline in the first quarter of 2009.
He expects the economy to resume growth by the end of this year and grow 1.25% next year. Darling said the British economy is diverse, flexible and resilient. From 2011, the government estimates the economy to continue its recovery, with growth of 3.5% from then on. Going forward, the economy will recover towards a trend rate of growth of around 2.75%.
Elsewhere on Wednesday, the Washington-based, International Monetary Fund said in its latest forecasts that the UK economy may contract 0.4% in 2010 after shrinking 4.1% in 2009.
Darling said inflation is forecast to reach 1% at the end of this year. Retail Price Index inflation is forecast to remain negative, falling to minus 3% by September, before moving back above zero next year. The annual rate of change in retail prices turned negative in March for the first time since 1960, official data showed Tuesday.
Public sector net borrowing will be a record GBP 175 billion this year or around 12.4% of GDP, he announced. As a share of GDP, borrowing will be 11.9% next year, and then it will fall to 9.1% in 2011-12. It is projected to further drop to 7.2% and 5.5% in 2013-14.
The net debt, which includes the cost of stabilizing the banking system, as a share of GDP, will increase to 68% next year from 59% in 2009, the Chancellor said.
Darling said, I am not proposing to increase taxes on income for this year. In November, he had announced a new rate of income tax of 45% on incomes above GBP 150,000. In order to help pay for additional support for people, he raised the rate to 50%, that will take effect in April next year.
In November, Darling had decided to reduce personal allowances for the very highest earners with incomes over GBP 100,000. But now he decided to fully withdraw the benefit of that allowance for those with incomes over GBP 100,000 from next April.
According to statistical office, the unemployment in the UK during the three months to February jumped to the highest level since 1997 as the worst recession since the World War II forcing companies to cut headcounts.
Darling stated that it is not in any Government's power to prevent all job losses. And even when the recovery is under way, it will take time for unemployment to start falling.
He announced an additional GBP 1.7 billion of funding for Job Centre Plus network. Darling said he wanted to offer a guarantee. From January, everyone under the age of 25, who has been out of work for twelve months, will be offered a job or a place in training. Persons who work will get a wage, while those in training will receive additional money on top of their benefits. To offer extra opportunities, the government is working with employers to create or support as many as 250,000 jobs.
Further, the government will spend over GBP 260 million of new money, for training and subsidies to help them get the skills or experience needed in sectors with strong future demand.
Darling said vehicle sales fell sharply on deteriorating consumer confidence and credit crunch. As reported earlier in the media, he announced a car scrappage plan that will give motorists a GBP 2000 discount to trade in vehicles which are ten years old. The scheme will be implemented next month.
More than 100,000 businesses that employ over half a million people took the option to defer their tax bills. Darling said this will continue and added that around 800,000 smaller companies will benefit from the delay in the increase in corporation tax.
He raised duties on alcohol and tobacco by 2%, effective tonight.
The Government took action to encourage an increase in mortgage lending and this year, the major UK banks will increase the availability of mortgages by around GBP 20 billion, Darling noted. He decided to extend the Stamp Duty holiday on properties sold for less than GBP 175,000 until the end of 2009.
Darling confirmed the raise in basic state pension by at least 2.5%. If RPI inflation this September is below zero, pensioners can be confident that their pensions will rise in real terms.
Concluding his speech, Darling said, You can grow your way out of recession. You cannot cut your way out.
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