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Analysis-Tough budget leaves UK's growth challenge unmet

People browse food items on display at a fruit and vegetable stall at Portobello Road Market in London

By William Schomberg and David Milliken

LONDON (Reuters) - British finance minister Jeremy Hunt says higher taxes and curbs on spending are the price that must be paid to allow the economy to grow in future, but his new budget offers little immediate help to the businesses that must lead any recovery.

Hunt, reminding lawmakers of his own past as an entrepreneur in marketing and publishing, made accelerating economic growth a priority in his budget speech to parliament on Thursday.

But most of his measures - ranging from heftier social security and value-added tax bills for employers, windfall taxes on energy firms and fewer incentives for research and development - are likely to do the opposite, at least for now,

And Hunt and Prime Minister Rishi Sunak had already told businesses they will face a hefty increase in tax on their profits from April.

Britain is badly in need of a growth fillip. It is the only Group of Seven economy yet to recover its pre-COVID size as it struggles with one of the highest inflation rates among rich countries, a shortage of workers, and barriers to trade with the European Union thrown up by Brexit.

In media interviews on Friday, Hunt dismissed criticism - some of it from within his own Conservative Party - that he was smothering growth, saying the expected hit to Britain's economy was less severe than the slowdown forecast for Germany.

He highlighted higher spending on education and his plan to build on Britain's highly ranked universities and its track record in innovation to foster a new Silicon Valley.

"This is an amazing country with extraordinary prospects and we're going to grip those prospects and make sure that in the medium term and the longer term this really does become the most prosperous and successful country in Europe," he told BBC radio.

But the journey is likely to be tough for British businesses.

The Office for Budget Responsibility, which provides the forecasts that underpin the government's budgets, said on Thursday it estimated the economy was already in recession and would shrink by 1.4% in 2023.

It also cut its growth forecast for 2024 to 1.3% before a better couple of years thereafter with growth at 2.6% and 2.7%.

The OBR said the 6-percentage-point rise in the corporate tax rate from April would hit investment, lowering the potential output of Britain's economy by 0.2% at the end of its five-year forecast period, and a bit more after that.

It said Hunt's plan to cut public investment from 2024 would probably weigh on productivity growth - key to an economy's long-term prospects - beyond its five-year forecasts.

SLOW GROWTH

Britain's medium-term sustainable growth rate is just 1.75%, the OBR estimated. That was unchanged from March, but now relies more on immigration - a sensitive topic for some voters - and less on business investment, with productivity also weaker.

Recession, higher interest rates, energy prices and taxation would combine to stifle investment, the OBR said.

The Confederation of British Industry, representing employers, welcomed a freeze in the business rates tax on commercial properties and the government's decision to stick with major infrastructure projects in nuclear power and rail.

But a freeze in the threshold for paying social security contributions for staff and the windfall taxes were "the sharpest stings in the tail," the CBI's chief economist, Rain Newton-Smith, said.

"Businesses will think there's more to be done on growth," she said.

The Institute for Fiscal Studies think tank advocates reforms to free up Britain's glacial system for construction permits and improve vocational and further education, and a redesign of business taxes to promote investment.

"Doing them isn't easy, though. There are reasons why previous governments have shied away," IFS Deputy Director Carl Emmerson said, adding that the full pay-off in areas like education would take decades.

Pressed on Friday about the slow growth outlook, including the impact of Brexit, Hunt said he was confident that frictions to trade with the EU would be fixed.

"I have tried to avoid anything that damages long-term growth," Hunt told the BBC.

For some analysts, there are still big questions about how he will boost growth beyond hastening a decline in inflation, which threatens to hit Britons with the biggest falls on record in their living standards this year and next.

J.P. Morgan economist Allan Monks said the OBR's lowered expectations for future productivity improvements were still higher than anything seen sustainably in Britain for 14 years and its forecasts for population growth also looked ambitious.

"The hope is that some good news turns up on growth and means that part of the planned fiscal consolidation will not need to happen," Monks said in an email to clients.

"This is certainly possible, for example if gas prices dropped more quickly than expected. But the OBR's longer-term forecasts still strike us as optimistic."

(Additional reporting by Andy Bruce; Editing by Catherine Evans)