By Sumeet Desai
LONDON, April 8 (Reuters) - British officials are still grappling over this month's budget as they try to balance the dire state of the public finances against the needs of a shrinking economy and an election pencilled in for next year.
After months of deliberations, Treasury officials say the April 22 budget statement is starting to take shape but final details still have to be worked out and need the approval of Prime Minister Gordon Brown.
On the table will be schemes to get people back to work, public works programmes and investment in areas like green technology, alongside a crackdown on tax avoidance and measures to tackle public sector waste and boost efficiency.
Brown has been calling for greater fiscal stimulus all over the world to combat the worst downturn since the 1930s but his own central bank governor warned last month that scope for more spending was limited given the size of the budget deficit.
Financial markets have since scaled back expectations for this month's budget but Brown made a habit of pulling rabbits out of the hat when he was finance minister for a decade before taking over as prime minister in 2007.
The media-savvy prime minister did it again at last week's G20 summit. After a series of leaks lowered expectations for the leaders' meeting in London, Brown announced an eye-catching trillion-dollar lifeline to fight the global downturn.
He needs crowd-pleasing measures now more than ever. With an election probably just over a year away, Brown's Labour Party, in power for 12 years, is way behind in the polls and the economy is shrinking at its fastest in nearly three decades.
"Gordon knows that every time he does something domestically, he gets a bounce in the polls," one policymaker told Reuters. "There's a lot of debate between politicians and the officials."
WHAT'S THE PROBLEM?
Bank of England Governor Mervyn King threw the cat among the pigeons last month when he said the government will want to be cautious about expanding the budget deficit any further, which analysts say could soon hit 10 percent of GDP.
Treasury officials were not amused though they publicly insisted that King had not said anything too controversial, especially as he had in the same breath backed the use of targeted measures to help job creation and boost credit.
But nor are they all convinced that the economy needs that much more stimulus. Darling announced a 20 billion pound package in November and the BoE has cut interest rates to a record low of 0.5 percent and has pledged to pump an extra 75 billion pounds into the economy in order to boost demand.
That, however, will not stop the economy shrinking in the region of 3 percent this year with the politically-damaging loss of hundreds of thousands of jobs even if recovery does come around the turn of the year as Darling signalled at the weekend.
In truth, economists everywhere are scratching their heads over when recovery will really come as many of their forecasting models failed to predict the severity of the present crisis.
BoE Monetary Policy Committee member David Blanchflower has called for a massive fiscal stimulus to get the economy moving again, arguing that the cost of inaction is much greater.
Brown probably likes that line. He regularly accuses the opposition Conservatives of being the do-nothing party. He got his biggest boost back in October when his multi-billion pound plan to recapitalise the banks was emulated around the world.
But officials are only too aware that whatever happens on April 22, they need to sketch out a path for the public finances to come back to heel in the future and there will likely be heavy emphasis on raising public sector efficiency targets.
The government has already said it will eventually raise tax rates for high earners, setting a trap for the centre-right Conservatives who will either have to go along with the hikes or say where they will find the shortfall.
The independent Institute for Fiscal Studies said this week that on existing plans, the government would need an extra 39 billion pounds to balance its budget in 2015/16.
In such circumstances, Darling might think another 20 billion pound stimulus package would be profligate.
"Anyone who knows Alistair knows that he doesn't like to splash out on a packet of crisps," said one Darling aide.