UK budget deficit 'set to outstrip Greece'

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The Independent Online

The UK borrowing deficit will outstrip any other country in the EU this year, according to figures from the European Commission today.

In its spring economic forecast the group predicts UK net borrowing will be 12% of output in 2010 - a higher proportion than any other country in the 27-member block and above Greece's 9.3%.

The Commission revised growth estimates for the UK upwards - although the 2011 figures still undershot Government expectations - while it boosted predictions for the euro area as a whole as officials sought to calm nerves over the Greek debt crisis.

It also cut predictions for UK borrowing, but it still sees the budget deficit in the next two years as higher than projected by the Treasury.

The report forecasts net borrowing of 11.5% in the financial year to March 2011 and 9.4% the following 12-month period, compared to forecasts of 11.1% and 8.5% respectively.

"Restoring the UK public finances is a central task, as they have been greatly weakened by a combination of the severe downturn, its impact on previously tax-rich income and expenditure, the operation of automatic stabilisers and the fiscal stimulus," the report said.

UK growth is predicted to be 1.2% this year - in line with Government expectations - but the 2011 figure of 2.1% is lower than the official expectations of output expanding around 3.25% next year.

As a whole, the EU expects the 27 European nation block to see growth of 1% this year and 1.7% in 2011.

But growth in the euro region will be dragged down by the shrinking economies of Spain, Greece and Ireland - contracting 0.4%, 3% and 0.9% respectively this year.

Europe's total government deficit has tripled since 2008 and is expected to peak this year at 7.2% of gross domestic product in the EU and 6.6% in the euro-zone, the EU said.

While Greece's deficit is not the highest in the EU, concerns about the government's ability to pay it back are higher because of its high debt levels and weak economy.

Concerns about the Greek crisis and possible contagion of its problems across the eurozone have sent stock markets into a tailspin over recent days.

But the Commission insisted a 110 billion euro (£94 billion) bailout for the country would help stop the crisis spreading to other European nations.

EU commissioner Olli Rehn said investor fears that Spain and Portugal would be dragged into the fray was "overshooting."

He stressed the Greek case was "unique" because of its heavy debt level and because it "cheated" on its statistics for years.

"In order to safeguard the economic recovery which is still rather modest and somewhat fragile, it is absolutely essential to contain the bushfire in Greece so that it will not become a forest fire and a threat to financial stability for the European union and its economy as a whole," he said, denying that a rescue package had been prepared for Spain.

Markets are jittery amid concerns that if trouble boiled over in Spain and Portugal they would both need far greater bailouts than Greece as they have more significant economies.

Total Greek debts are expected to hit 124.9% of gross domestic product (GDP) in 2010, rising to 133.9% next year.

This compares to debts at 79.1% for the UK in 2010, 64.9% for Spain, 118.2% in Italy and 85.8% for Portugal.

Spain's deficit is forecast to be 9.8% of GDP this year, with Portugal estimated to be 8.5%.

When they created the euro, governments agreed not to let their deficits exceed 3%, but the rules were soon broken, even before the crisis.

Laurence Boone, of Barclays Capital, said the forecast deterioration in Greece's debt levels was likely to have been put together before the announcement of the rescue package for the country.

"Given the growth weakness and the lack of precision on a fiscal exit strategy for most countries, the European Commission is drawing a fairly pessimistic outlook in terms of public finances with the euro area deficit to GDP ratio deteriorating further in 2010 to 6.6% and the debt to GDP ratio widening from 78.5% in 2009 to 84.7% in 2010," he added.