UK sees slower growth, above-target inflation

By Matt Falloon and David Milliken

LONDON (Reuters) – Britain cut its economic growth forecast on Wednesday and said inflation would remain above target this year and next in a budget that stuck to ambitious deficit-busting goals.

Seeking to support a faltering economy, finance minister George Osborne said corporation tax would be cut by two percentage points to 26 percent from April, rather than by just the one point originally planned.

A levy on banks would be increased to pay for it.

Osborne cut his growth forecasts to 1.7 percent in 2011, and 2.5 percent in 2012, citing figures from the government’s independent fiscal watchdog. In November, growth was estimated to be 2.1 percent this year and 2.6 percent in 2012.

Sterling fell to the day’s low versus the dollar in response to the new economic forecasts.

The Conservative-Liberal Democrat coalition government is attempting to eliminate most of a deficit of 10 percent of national output before the 2015 election, while also nurturing a fragile economy back to health.

Public borrowing would fall less steeply over the next four years than previously hoped but the bulk of the budget deficit would still be eliminated by 2015, Osborne said.

Policymakers at the Bank of England face a dilemma, with inflation running at more than double their 2 percent target while the economy is still in a fragile state and needs the support of record low interest rates.

Osborne said soaring oil prices meant inflation would remain between 4 and 5 percent this year before dropping to 2.5 percent next year.

UK sees slower growth, above-target inflation