Britain facing biggest deficit in Western world, warns OECD

Hopes that the biggest post war economic slump will soon end have been dashed after the rich world's leading economic institution slashed its forecasts for economic growth and warned that Britain next year faces the worst deficit in the industrialised world.

In a further blow for Alistair Darling, the Organisation for Economic Co-operation and Development also warned that the Government may have to pump more than £130bn extra into the banking system.

Most economic statistics released in recent months have been better than expected, including the CBI's distributive trades survey yesterday, which was the strongest for a year.

However, the OECD downgraded its forecast for UK growth this year to a contraction of 4.3pc – compared with a previous forecast of -3.7pc.

The cut is significant, since the OECD chose on the other hand to increase its growth forecast for the world's leading industrialised economies from -4.3pc to -4.1pc. It added that the 30 member OECD would grow by 0.7pc next year, while Britain would stagnate, not growing at all.

The OECD said that not only was Britain's fiscal position far weaker than its neighbours, following many years of high borrowing by Gordon Brown, the UK was also more vulnerable to a consumer slowdown associated with falling house prices.

The Paris-based institution said the Government's fiscal deficit next year would climb to 14pc of gross domestic product – higher than anywhere else in the OECD, including Ireland and Iceland. The report urged the Bank of England to keep "the [interest] rate as close to zero as possible up to end 2010."

It also warned that more taxpayers' money may have to be poured into the financial system, saying: "further bank losses may well require substantial further capital injections by governments." It said the UK may have to spend a further 3-9pc of GDP – equivalent to £45bn-£135bn.

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