* UK budget deficit to hit 175 billion pounds this year
* UK economy forecast to shrink 3.5 percent this year
* Top earners to face new 50 percent tax rate
* Debt issuance to hit record 220 billion pounds this year
By Sumeet Desai and Matt Falloon
LONDON, April 22 (Reuters) - Britain's budget deficit will soar to a record 175 billion pounds as the economy shrinks at its fastest pace since World War Two this year, finance minister Alistair Darling said on Wednesday.
To help bridge the yawning gap, Darling will slap a new 50 percent tax rate on the highest earners but the government will still have to issue a record 220 billion pounds of government bonds, way above even the highest forecasts.
With an election due by June 2010 and the Labour Party way behind in the polls, Darling forecast the economy would start growing again next year, by as much as 1.5 percent, and pledged several billion pounds of spending to support industry and jobs.
"The action already taken here, and internationally, and the measures I will announce today, mean that I expect the economy to start growing again towards the end of the year," Darling, 55, told a packed lower house for his second annual budget.
But analysts were sceptical that recovery could come so soon and even more so of forecasts that the economy would in two years start steaming ahead at a rate of 3.5 percent to bring the public finances back on a sustainable path.
"These forecasts are mildly optimistic in the near term and much more optimistic in the long term," said Howard Archer, economist at Global Insight.
Bond markets took fright. The June gilt future fell more than a full point as details of the extent of government bond supply came out, around a third of the total existing stock.
"It was certainly a shock, the market is taking it a bit hard," said Sean Maloney, strategist at Nomura.
The pound also tumbled by more than 1 percent against the dollar on concerns about the viability of the public finances.
GLOBAL SLOWDOWN
Darling predicted the economy would shrink by 3.5 percent this year, the fastest rate of contraction since 1945. Many countries are in the same boat as a global credit crunch has ravaged the world economy and cost millions of jobs.
The International Monetary Fund was more pessimistic, forecasting on Wednesday that Britain would contract by 4.1 percent this year, and in stark contrast to Darling's forecast of a quick return to growth, drop a further 0.4 percent in 2010.
It also predicted a 5.6 percent slide for the German economy this year and 6.2 percent in Japan this year.
With tax revenues and collapsing and social security payments soaring -- Britain's unemployment rate is at a 11-year high -- Darling predicted borrowing would total 175 billion pounds, more than 12 percent of GDP, this fiscal year and 173 billion pounds next year.
The combined total is 125 billion pounds higher than he predicted just five months ago.
The day's big surprise, however, was the decision to raise the top rate of tax for people earning over 150,000 pounds to 50 percent from 40 percent, as of next April, shortly before the expected date of the next election.
In addition, those earning over 100,000 pounds will lose their tax free allowances and will also lose the higher rate of relief they get on pension contributions.
But the revenues these measures will raise is small and analysts questioned whether the moves might be more politically-inspire as a way of creating a dividing line between Labour and the centre-right opposition Conservatives.
Conservative leader David Cameron harked back to the years of effort by Labour to build a reputation for economic competence -- something it was perceived to lack in the past.
"As of today any claim they have ever made to economic competence is dead, over, finished," Cameron said. "He is planning to borrow 348 billion pounds over the next two years. That is more than every previous government put together." (additional reporting by Luke Baker, Christina Fincher, Fiona Shaikh, David Milliken, Keith Weir, Kate Kelland, Frank Prenesti, Adrian Croft; editing by Mike Peacock)