Page last updated at 00:06 GMT, Monday, 16 February 2009

CBI warning over recession cash

Closed shop on London's Oxford Street
The CBI predicts household spending will fall 2.7% this year

The government will have to borrow 100bn more than anticipated during the recession, the Confederation of British Industries (CBI) says.

The figure is among dire predictions it makes about the UK economy in 2009.

The CBI says that the economy will contract by 3.3% this year, compared with its previous forecast in November that it would shrink by 1.7%.

The CBI predicts there will be 2.9 million people unemployed by the end of 2009, topping three million in 2010.

'Deep recession'

It adds government borrowing will be 148bn this year, well above the 118bn Chancellor Alistair Darling expects.

The Treasury expects borrowing to fall in 2010 to 105bn, but the CBI predicts it will rise again to 168bn.

"Given the rapid contraction in global economic activity, and the continuing credit squeeze, we believe the UK will be mired in a deep recession for the whole of 2009, lasting six quarters in total and accompanied by a significant rise in unemployment," says CBI chief economic adviser Ian McCafferty.

Britain now has a serious structural deficit due to Gordon Brown's mismanagement of the public finances
Jeremy Browne, Lib Dems

"You would have to go back a long way before you found a deficit as high as 10% of GDP. In recent years we have seen deficits of around the 3% mark as being strongly sustainable," he said.

People worried about losing their jobs are likely to cut back on their spending and the CBI predicts household spending will fall 2.7% this year and another 1.2% in 2010. Businesses are also expected to cut the amount of money they invest.

The CBI says it does not expect the Bank of England to cut interest rates much further than the current rate of 1% - the lowest in the bank's history.

It expects the "speed and severity of the recession" as well as the drop in energy prices and the recent VAT cut, to push inflation well below the bank's 2% target

In spite of all the gloom, the report predicts that spending will stabilise early next year with the recovery growing through 2010.

Liberal Democrat economic spokesman Jeremy Browne said: "Alistair Darling's forecast that the economy would start to grow again in July never looked very plausible, and now looks absurd.

"Government borrowing inevitably rises during a recession, but Britain now has a serious structural deficit due to Gordon Brown's mismanagement of the public finances.

"Instead of ineffective measures like a temporary VAT reduction, the government should be helping the economy through green infrastructure projects and permanent tax cuts for people on low and middle incomes."

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