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Incoming British government 'must tackle rising debt'

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(BRUSSELS) - New EU forecasts on Wednesday on the eve of the British general election put Britain under the highest public deficit levels in Europe, with Brussels warning the next government must focus first on the shortfall.

British Prime Minister Gordon Brown could take some solace in the relatively high growth rate of the national economy, expected to rise to 1.2 percent this year, above the EU average and much higher than earlier predictions.

However the level of Britain's public deficit against economic output is estimated to be worse than that of Greece, which has gone cap-in-hand to the eurozone and the IMF for a 110-billion-euro (145-billion-dollar) rescue package.

"The first thing for a new government to do is to agree on a convincing and ambitious policy programme of fiscal consolidation to start reducing the very high deficit, and stabilise the high debt level," said the EU's economic affairs commissioner Olli Rehn.

Britain's public deficit level in 2010 is forecast to hit 12 percent of output, the highest rate among the 27 EU nations.

Of the others only Ireland's deficit rate was in double figures while the estimate for Greece was down to 9.3 percent from 13.6 percent last year.

The nominal EU limit, which survives only theoretically at the moment, is three percent.

Britain's "very high deficit" and overall high debt level is "by far the most important challenge for the new government. I trust that, whatever the colour of government, it will take these measures. It will need broad political consensus to achieve this key goal," said Rehn.

The economy has been at the heart of the election campaign, with a major difference between the ruling Labour party and the opposition Conservatives over how to tackle the deficit.

While the Conservatives, leading in pre-vote opinion polls, are promising deep budget cuts this year, Labour insists that such measures should be put off until 2011 to avoid strangling the recovery and throwing the country back into recession.

Rehn's talk of the need for "broad political consensus" is a nod to the strong possibility that Thursday's general election will result in a rare coalition government in Britain.

"From such a large deficit, we suspect that it will be hard for a hung parliament to establish a credible path back to fiscal sustainability." warned Citigroup analyst Michael Saunders.

Normally British elections result in one party gaining an overall majority of the seats in parliament and therefore being able to govern alone.

However the opinion polls suggested Thursday's vote could well result in the first hung parliament in the country since 1974, with no one party able to form a majority.

The overall level of British debt was predicted to hit 79.1 percent this year, well above the EU's normal 60 percent ceiling but in line with the average rate for European Union members recovering from the global recession.

Britain's deficit forecast for 2011 is 10 percent of GDP, again well above the EU average and trumped only by Ireland, where the gap is expected to expand next year to 12.1 percent.

While Britain is not a eurozone nation, and thus not bound by its fiscal rules, the maximum debt and deficit figures are a benchmark for all EU member states.

Overall the EU Commission saw a "fragile recovery in the face of headwinds" for the British economy, regardless of who wins on Thursday.

"Restoring the UK public finances is a central task," the commission said in its report.

"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," it added.

2010 European economic forecasts in figures
European Economic Forecast - Spring 2010

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