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UK to fall furthest into debt, warn economic experts

The UK is predicted to sink further into the red than any other major developed country next year, an economic body warned today.

The fiscal deficit is expected to rise to 14 per cent of economic output in 2010, compared to an average of 8.75 per cent in the 30 most developed markets, according to a report by the Organisation for Economic Co-operation and Development (OECD).

The OECD warned that "public finances have deteriorated sharply" since the beginning of the recession and called on the UK to continue to develop "a strong and credible" framework for reducing the ratio of debt to output.

"To improve stability, the government should continue to develop a concrete and comprehensive plan to ensure that debt is on a declining path once recovery takes hold," the OECD said.

The OECD said the state of the UK's balance sheet meant the possibility of extra stimulus to the economy was curtailed.

The report said Ireland, the US and Spain are all expected to have fiscal deficits above the average figure next year.

It also said the UK economy was likely to recover "only mildly" in 2010, with any return to health dependent on an upturn in the housing market and credit availability.

The report said the downturn in economic activity had pushed up unemployment and reduced wage growth inflation.

It predicted that UK unemployment, which currently stands at a 12-year high of more than 2.2 million, will "rise substantially" and "labour market conditions will remain unfavourable for a long period".

"While labour market flexibility remains relatively high in the United Kingdom, policies to help the unemployed remain employable should remain a priority," it said.

The OECD said the rate of unemployment is expected to grow to 9.7 per cent in 2010, double that seen just five years before, although this is still lower than other countries. Spain is set to see the worst level of unemployment, at 19.6 per cent, while the US level is predicted to rise to 10.1 per cent.

The OECD predicted that the UK economy would contract by 4.3 per cent this year, worse than the Government's predictions of a 3.5 per cent fall in output and more pessimistic than its March report.

The glum forecast had an impact on the OECD's fiscal deficit expectations of 12.8 per cent for the country in 2009.

In his Budget speech, Chancellor Alistair Darling said the budget deficit would amount to 12.4 per cent of output in this financial year, falling to 11.9 per cent next.

Recent official figures showed UK overall net debt stands at a mammoth £774.8 billion, about 54.7 per cent - the biggest proportion for more than 30 years.

The OECD also forecast a "sluggish" recovery would take place in 2010, but its expectation for flat output across the year was better than a previous prediction for a 0.2 per cent contraction.

Its report said the world's major developed economies may be approaching the bottom of their recessionary slumps.

The crisis "could have been worse", it said, but state interventions helped to avoid "an even darker scenario".

"OECD activity now looks to be approaching its nadir, following the deepest decline in post-war history," the report said.

"The ensuing recovery is likely to be both weak and fragile for some time.

"And the negative economic and social consequences of the crisis will be long-lasting."