Darling defiant as G7 signals hope that the worst is over

Chancellor stands by Budget forecasts
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The Independent Online

His forecasts for the economy and public borrowing may be under fire, but the Chancellor, Alistair Darling, struck a defiant note in Washington as he arrived yesterday for the G7 summit and the annual meeting of the IMF.

Mr Darling said: "I think there are reasons to be confident about the economy." Reacting to worse-than-expected numbers on the contraction of the economy in the first three months of the year – down 1.9 per cent – Mr Darling added: "I always said the first quarter would be difficult ... I remain confident we'll see growth return at the turn of the year."

Mr Darling's Italian counterpart, Giulio Tremonti, said the G7 believed that the contraction in the global economy was slowing, with positive signs emerging. Even so, the IMF's managing director, Dominique Strauss-Kahn, said that 2009 would be a "horrible year".

The latest UK growth figures and worsening forecasts from the City and the IMF have prompted renewed worries about Britain's ability to service her debts. Even on Mr Darling's own Budget forecasts, some £703bn will be borrowed by the Treasury over the next few years, taking national debt up to 80 per cent of GDP. Many believe it will be even higher.

"The Treasury's borrowing forecasts of £175bn for this financial year were based upon a 3.5 per cent contraction for 2009," said Ben Read, an economist at the firm of analysts CEBR. "We think that the real figure will be at least £190bn, which will put even more pressure on the public finances over the medium term. Whilst it is possible that we will see an inventory-led bounce towards the end of this year, the medium-term prospects are surely for an incredibly sluggish recovery."

Echoing these concerns, the ratings agency Moody's warned that the national balance sheet "is deteriorating rapidly, due to a combination of weakening revenues and the accumulation of sizeable assets and contingent liabilities as a result of successive bank bailouts ... The Government is taking risks with public finances."

Gilt yields have edged up since the Budget, in response to the £220bn gilt issuance programme, which was more extensive than anticipated, and remarks from a Bank of England policymaker about the possible curtailment of the programme of "quantitative easing" – buying gilts – after the initial allocation of £75bn is used up over the next few months.

Mr Darling reiterated the Government's calls in the recent G20 Summit in London for concerted international activity to combat the crisis, as agreed then. "Our priority today must be to turn that agreement into action," he said. "Each individual G20 country must put the commitments into practice. Our actions are now what count."

He added: "Implementation is now our priority. We must all look for real progress to have been, and to be made urgently. It is clear that as well as taking action at home, every G20 country is determined to act together to restore growth, take steps to restore lending and prepare for recovery. Cleaning up the bank balance sheets is essential because if we do not fix the banks we will not fix the economy."

In particular, the Chancellor pointed to the growing instability of many emerging economies, particularly in eastern Europe. "Emerging markets and developing economies continue to be most at risk from the reversal of capital flows and the withdrawal of credit," he said. "It is not only our moral imperative but also in our economic interest to provide support to these countries ... [to] minimise the long-term damage to global potential."