UK budget deficit 'to surpass Greece's as worst in EU'

European commission's spring forecasts put UK budget deficit this year at 12% of GDP – the highest in the European Union and worse than Treasury estimates

Whoever wins the election must make sorting out the public finances the top priority, the European commission warned on the eve of the poll, as it predicted the British budget deficit would swell this year to become the biggest in the European Union, overtaking even Greece.

The commission's spring economic forecasts put the UK deficit for this calendar year at 12% of GDP, the highest of all 27 EU nations and worse than the Treasury's own forecasts.

The country's budget shortfall was the third largest in the EU last year but will overtake both Greece and Ireland this year, according to the forecasts. Greece's measures to tackle its public finances problems are projected to cut its deficit to 9.3% of GDP.

Worries about Britain's public finances – in their worst state since the end of the second world war – continue to unnerve financial markets and analysts are divided over whether a hung parliament will have the clout to rapidly reduce the deficit.

"The first thing for the new government to do is to agree on a convincing, ambitious programme of fiscal consolidation in order to start to reduce the very high deficit and stabilise the high debt level of the UK," said European economic and monetary affairs commissioner Olli Rehn.

"That's by far the first and foremost challenge of the new government. I trust whatever the colour of the government, I hope it will take this measure."

The deficit forecasts are an improvement on the commission's last outlook for Britain but they still paint a gloomier picture than the government itself.

In financial year terms, the commission's forecasts are for a worse deficit than predicted by Alistair Darling at his March budget. In 2010/11 the commission puts the deficit at 11.5% of GDP, compared with Darling's forecast for an 11.1% ratio of public sector net borrowing – the gap between tax and spending – to GDP.

The EU's executive did double its forecast for British growth this year to 1.2% from 0.6%, in line with a March budget forecast for 1-1.5%. But in 2011 it warns growth will only pick up to 2.1%, significantly below a Treasury forecast of 3-3.5%.

It described "a slow start to a protracted recovery", highlighting pressures on private consumption, a key growth driver, from employment worries and stagnant wages.

Darling pointed out that the commission expected the UK to grow more quickly than other major European countries next year – including Germany, France, Italy, and the Netherlands. "The European commission's report shows again that our judgment call to support the economy was right. Yet again George Osborne's flaky judgment is exposed. The Tories cannot be allowed to derail the recovery," he said.

But opposition politicians seized upon the outlook as evidence that a new government was needed to get the economy back on track. "The day before the election the European commission has issued a damning indictment of Gordon Brown's economic record," said shadow chancellor George Osborne, claiming only the Conservatives would start dealing with Britain's debts on Friday.

"He has left this country with the largest budget deficit in Europe – larger even than Greece – and projections for future growth well below his own forecasts."

Liberal Democrat Treasury spokesman Lord Oakeshott said the EU report laid bare government overconfidence. "This shows the government has been far too optimistic," he said.

"What matters now is a credible deficit reduction plan backed by the nation. If the Conservatives scrape home with barely a third of the vote and indulge in butchery behind closed doors, that just won't work. That's why the Liberal Democrats call for a council of fiscal stability with all three economic spokesmen, whoever they are, and the governor of the Bank of England to agree a credible deficit reduction plan."

Economists warn that if the next UK government drags its feet in reducing the deficit it could spark a downgrade from one or more of the ratings agencies that have been so swift to reassess Greece and Spain's creditworthiness. The commission's forecasts fanned those fears.

"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," said Michael Saunders, an economist at Citigroup.

London-based economists at BNP Paribas, have warned that the City is grossly underestimating the chance of a downgrade from the UK's current top-notch AAA status. They warn that an undecided Britain is heading towards a coalition government that would create distractions from repairing the public finances - something that would raise the chance of a downgrade to almost 50%, compared with a consensus estimate of 10% risk .

That, they say, could cost the taxpayer at least £10bn because of higher interest costs on government borrowing.

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