Darling to issue gloomiest budget in generation

By Sumeet Desai

LONDON (Reuters) - Chancellor Alistair Darling looks set to ramp up public borrowing to at least 160 billion pounds this year as he admits the economy will shrink at its fastest pace in over 60 years.

With an election due by June 2010 and the ruling Labour Party far behind in the polls, Darling's second annual budget on Wednesday will stress recovery should come by year-end and will surely contain some headline-grabbing sweeteners.

"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.

That won't hide the bad news. Darling will likely forecast an economic contraction of 3-3.5 percent in 2009 and the budget deficit hitting a post-war record of perhaps 12 percent of GDP as Britain suffers its first recession since the early 1990s.

His budget statement, likely to be the gloomiest in a generation, will also come just hours after new figures are expected to show another 120,000 people signed on for unemployment benefits last month.

The dire state of the public finances, however, means that the government can't splash out in the way it did in the November pre-budget report which contained a 20 billion pound package fiscal stimulus package, including a cut in sales tax.

Still, government sources told Reuters at the weekend that Darling would likely put 2 billion pounds into schemes aimed at getting people, particularly the young, back to work and another 500 million pounds into environmental initiatives.

The political imperative of an election means that further significant crowd-pleasing initiatives may also be in the pipeline. Prime Minister Gordon Brown desperately needs to regain the initiative after a scandal over emails sent by one of his aides have dominated headlines for more than a week.