Borrowing said to trigger deferred tax rises

LONDON (Reuters) - Annual public borrowing is set to climb towards 120 billion pounds over the next two years, forcing the chancellor to announce plans for deferred tax rises and public spending curbs in his pre-budget report, the Financial Times said on Friday.

A "mammoth shock" to the economy will cause tax revenues to fall far below previous government forecasts, even before Chancellor Alistair Darling announces what is promised to be a "decisive" temporary fiscal stimulus, the report added, citing ministry officials.

Darling will present his pre-budget report on Monday. It is likely to contain tax breaks, measures to boost lending to small businesses and a government efficiency drive as part of a stimulus package to stave off a prolonged recession.

Even without any giveaway, economists are already pointing to deficits of more than 65 billion pounds this financial year and around 100 billion pounds in the next fiscal year.

However, the FT report said the budget deficit could widen to 8 to 9 percent of gross domestic product over the next two years, taking it close to 120 billion pounds.

Darling will be left with little choice but to announce deferred tax rises to kick in when the economy recovers, it added.

This might reassure markets but would expose Labour to attacks from the Conservatives.

Labour has won plaudits for its response to the global financial crisis and has closed the gap on the Conservatives in opinion polls.

The next general election must be held by mid-2010. Labour's handling of the economy during the downturn could determine whether it is able to extend the grip on power it has enjoyed since Tony Blair became prime minister in 1997.