Economy to shrink at fastest since 1945

By Sumeet Desai

LONDON (Reuters) - The country's budget deficit will soar to a record 175 billion pounds as the economy shrinks at its fastest pace since World War Two this year, Chancellor Alistair Darling said Wednesday.

To help bridge the yawning gap, Darling will slap a new 50 percent tax rate on the highest earners but the government will still have to issue a record 220 billion pounds of government bonds, way above even the highest forecasts.

With an election due by June 2010 and the Labour Party way behind in the polls, Darling forecast the economy would start growing by as much as 1.5 percent next and pledged several billion pounds of extra spending to support industry and jobs.

"The action already taken here, and internationally, and the measures I will announce today, mean that I expect the economy to start growing again towards the end of the year," Darling, 55, told a packed lower house for his second annual budget.

But analysts were sceptical that recovery could come so soon and even more so of forecasts that the economy would in two years start steaming ahead at a rate of 3.5 percent to bring the public finances back on a sustainable path.

"These forecasts are mildly optimistic in the near term and much more optimistic in the long term," said Howard Archer, economist at Global Insight.

Bond markets took fright. The June gilt future fell more than a full point as details of the 220 billion pounds of gilt supply came out, around a third of the existing stock.

"It was certainly a shock, the market is taking it a bit hard," said Sean Maloney, strategist at Nomura.