Britain awaits budget to fight debt

Britain's Labour government delivers its latest taxation and spending plans this week against the backdrop of soaring national debt and a record recession and ahead of a general election in 2010.

Finance minister Alistair Darling unveils his pre-budget report – a curtain-raiser to the main 2010-2011 budget due early next year – before parliament on Wednesday in the midst of the nation's longest recession on record.

Darling is expected to focus on fixing Britain's public finances, which have buckled under the weight of massive bailouts of struggling banks and a sharp economic downturn that has slashed taxation revenues.

This year's pre-budget also comes ahead of a general election due by mid-2010 that British Prime Minister Gordon Brown's ruling Labour party is widely tipped to lose to the main opposition Conservatives, according to polls.

"The main parties are already drawing up battle lines," Jeremy Batstone-Carr, a strategist at the Charles Stanley brokerage, said ahead of Wednesday's mini-budget.

"Not least of the issues – and the one probably ranking highest on the 'to do' list – is how to solve the UK's diabolical fiscal position."

Britain's government has borrowed £86.9 billion (Dh528bn) so far in the current financial year that began in April.

And a number of economists believe that borrowing is likely to breach Darling's official target of £175bn for 2009-2010.

"The dire state of the public finances means that fiscal policy will be uppermost in markets' minds next year," said Investec Securities economist Philip Shaw.

International ratings agency Fitch recently warned that Britain was the country most at risk of losing its top-level AAA credit assessment owing to the state of its public finances.

In a bid to cut the nation's debt, Chancellor of the Exchequer Darling could increase income tax and also raise capital gains tax, which is levied on assets that are sold at a profit, analysts said.

Already this year, Darling has moved to raise the highest rate of income tax to 50 per cent.

In a bid to further increase the state's income, economists said the government may decide to extend relief on property tax.

Britons are currently exempt from paying a tax on property purchases, known as stamp duty, for houses and flats costing less than £175,000. The so-called "stamp duty holiday" is due to expire on December 31.

"Of the current wave of rumours surrounding tax hikes, we judge that a rise in capital gains tax is the most credible," said analyst Shaw.

Darling is meanwhile expected to stick by plans to reverse last year's tax cut on goods and services.

The government had slashed VAT to 15.0 per cent in December 2008 to help boost consumer spending. But it promised to return VAT to the pre-recession level of 17.5 per cent in January.

Analysts predict that Darling will save any big vote-winning policy measures for the main budget.

"With an election expected in May or June 2010, any policy fillips are likely to emerge in the budget in March or April 2010," said Royal Bank of Scotland economist Ross Walker.

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