The UK economy is set to grow at a slower rate than previously expected this year, Alistair Darling said in his Budget speech.
The growth forecast for 2008 has been revised down from 2.5% to between 1.75% and 2.25% - the biggest slowdown since Labour came to power in 1997 - following on from 3% growth in 2007. But Darling estimated that growth would recover to between 2.25% and 2.75% in 2009 and then back to between 2.5% and 3% in 2009.
The downward revision of the economy’s growth prospects - which had been widely expected - is due to disruption in global financial markets. Darling said the negative impact of the downturn will be more prolonged than assumed in the 2007 pre-budget report, following further evidence that developments in financial markets are creating tighter credit conditions for both individuals and businesses.
He added that the inflation target - based on the Consumer Prices Index - of 2%, would not change. But Darling warned that there would be pressure on inflation in the short-term due to rising global agricultural and energy prices, although it is expected to fall back by the end of 2008.
Public borrowing levels, however, are set to rise by £7 billion more than Darling had previously predicted, to £43 billion in the coming tax year, attracting criticism that the government failed to strengthen its economic position during the years of strong growth.
"Darling highlighted weaker global growth, financial market turmoil and tighter lending conditions influenced markedly by the US crisis." said Howard Archer, chief UK economist at Global Insight. "This skates over the fact that the UK economy has serious problems of its own - notably including high household debt levels and an over-extended housing market."
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