Labour to ditch prudence for life support

By Matt Falloon

LONDON (Reuters) - The Labour government is expected to deliver an expensive shot into the arm of the economy next week in a gamble to stave off a prolonged recession and boost the party's recovering popularity.

Its annual pre-budget report on Monday is likely to contain tax breaks, help for households and small businesses and more state efficiency savings as part of a fiscal stimulus package, according to political insiders, economists and media reports.

Speculation centres on a stimulus of one percent of GDP -- 15 billion pounds -- and some experts forecast more after a summit of world leaders this month called for fiscal spurs to take "rapid effect" in the face of the worst financial crisis in living memory.

But there are growing concerns about how much is needed to fund the life support plan, and whether burgeoning debt levels will hamper recovery and damage fiscal credibility.

"Britain has effectively ditched its fiscal rules and arguably has a more adverse fiscal background than all of its G7 peers," said Philip Shaw, chief economist at Investec.

"Moreover, the day of reckoning will eventually come, when the authorities will have to deal with the huge shortfall."

Public sector net debt this year has already hit its highest running total since records began in 1946 and the public finances are expected to deteriorate further as a weakening economy drives down tax receipts and raises welfare payments.

Finance minister Alistair Darling will have to slash his growth forecasts to reflect a much-altered picture since March, when he saw growth around 2 percent this year and 2.5 percent in 2009. The economy shrank 0.5 percent in the third quarter and is expected to contract through 2009 before slowly recovering.  Continued...