Darling's Budget set to reveal disastrous growth forecast for UK economy

The British economy will contract by about 3 per cent this year, the Chancellor, Alistair Darling, is expected to forecast in his Budget on 22 April. The Treasury prediction will mark an embarrassing retreat for Mr Darling, who was accused of being over-optimistic last November when he said gross domestic product would decline by between 1.75 and 2.25 per cent this year.

At the time, the Chancellor believed the economy would start to grow in the second half of this year. Despite some optimist signs in the housing market last week, he believes the recovery will not start until the year-end. Mr Darling prepared the ground for his retreat in media interviews yesterday in which he lowered expectations for his Budget.

The longer-than-expected recession means this year's public borrowingwill rise well above the £118bn figure he forecast in November, possibly to £150bn. That could force him to announce tax rises to balance the nation's books over the medium term. His comments dampened some of Labour's optimism after the G20 summit in London last week.

But the summit appears to have boosted Gordon Brown's standing with the people. The first survey since the meeting shows the Tory lead has fallen to seven points. The YouGov survey for The Sunday Times put the Tories on 41 per cent, Labour on 34 per cent and the Liberal Democrats on 16 per cent.

The latest "poll of polls" for The Independent reveals that Mr Brown has halted the slide in Labour's fortunes since the start of this year. The 14-point lead the Tories enjoyed over Labour in February fell to 11 points in March, when the Tories were on 41 per cent (down two points), Labour on 30 per cent (up one point) and the Liberal Democrats on 18 per cent (up one). The latest figures would give David Cameron an overall majority of 34 seats at a general election but Labour is closing the gap.

"Labour's post-Christmas slide in the polls has halted and even reversed slightly," said John Curtice, professor in politics at the University of Strathclyde, who compiled the "poll of polls". He called the present position "enough for the Tories to be hopeful, but far from confident and bad enough for Labour to want to delay its appointment with the electorate as long as possible, but not sufficient to extinguish all hope".

Ministers admitted the backdrop to the Budget was "grim". Further evidence that the next government will have to raise taxes and cut spending emerged in a leaked account of a recent conference for suppliers held by senior Department for Transport officials.

They said the Chancellor aimed to bring the public finances back on track over seven to 10 years, suggesting that "this couldn't be done without significant cuts in public spending or increases in personal taxation (or both)". Officials said the Department for Transport's budget would remain "flat" over the coming years, and £700m of spending brought forward to the present financial year would have to be "repaid".

George Osborne, the shadow Chancellor, said: "Here we find senior civil servants saying: the Government's finances are in a mess, it will take years to clean up, and the answer is restraining public spending."