By William Schomberg and David Milliken
LONDON (Reuters) - Britain will borrow almost 400 billion pounds this year to pay for the massive coronavirus hit to its economy, finance minister Rishi Sunak said on Wednesday, as he took his first steps to offset the country's highest budget deficit outside wartime.
The world's sixth-biggest economy is now set to shrink by 11.3% in 2020 - the most since "The Great Frost" of 1709 - before recovering by less than half of that in 2021, Sunak told parliament as he announced a one-year spending plan.
"Our health emergency is not yet over. And our economic emergency has only just begun," he said, promising more money for health, infrastructure, defence and to fight unemployment.
Britain's budget watchdog estimated borrowing would be 394 billion pounds ($526 billion) in the 2020/21 financial year that began in April, slightly more than it predicted in August.
At 19% of gross domestic product, the deficit will be almost double its level after the global financial crisis which took nearly a decade of unpopular spending squeezes to work down.
Sunak announced cuts to foreign aid spending and a freeze on pay for many public sector workers.
But with many public services still stretched, Sunak is expected to look more at tax rises to make up the shortfall.
"We have a responsibility, once the economy recovers, to return to a sustainable fiscal position," he said on Wednesday.
Britain was hammered harder by the coronavirus pandemic than most other rich economies as it underwent a long lockdown.
Nearly 56,000 Britons have died from COVID-19, the highest death toll in Europe.
Even with recent positive news about vaccines, the Office for Budget Responsibility (OBR) said the economy was only likely to regain its pre-crisis size at the end of 2022 - or later if Britain fails to get a post-Brexit trade deal with the European Union before a transition arrangement expires on Dec. 31.
Sunak made no reference to Brexit in his speech.
YET MORE SPENDING
Since the pandemic struck Britain a few weeks after he took over as finance minister, the former Goldman Sachs analyst has rushed out emergency spending - much of it on pay subsidies to fend off a surge in unemployment - and tax cuts.
The shift away from the traditional economic orthodoxy of the Conservative Party has alarmed some lawmakers.
Sunak said the cost of his measures to fight the coronavirus was now 280 billion pounds for this year, up from a previous estimate of about 200 billion pounds.
Even so, long-term economic damage of roughly 3% of GDP was likely as a result of COVID-19, the OBR said.
Unemployment was likely to peak at 7.5%, from 4.8% now.
With that damage in mind, Sunak sought to stress how spending would rise in the short term as Britain grapples with the fallout from the pandemic.
Over this year and next, day-to-day spending will rise by 3.8% in inflation-adjusted terms, the fastest growth rate in 15 years.
To meet Prime Minister Boris Johnson's promise of "levelling up" growth around the country, 100 billion pounds will be spent next year on longer-term investments, 27 billion pounds more than last year.
A new national infrastructure bank will be based in the north of England, where many voters broke with tradition and backed Johnson in last year's election.
Johnson later told Conservative lawmakers at a meeting of the 1922 Committee that he was confident the British economy could bounce back quickly, and that his government would deliver for the people who elected him, a lawmaker attending the meeting said.
The OBR said it would take 1% of GDP of spending cuts or tax hikes to bring the government's day-to-day spending into line with its revenues. Debt was likely to rise further, to over 109% of GDP in 2023/24, up from about 101% now.
Paul Johnson, head of the Institute for Fiscal Studies think-tank, said the headline numbers were "completely staggering" but hid a squeeze on spending in three or four years' time which would be challenging to deliver.
Sunak signalled some early cost-saving moves, including the freeze on pay for public sector workers, except for doctors, nurses, other health staff and the lowest-paid public sector workers.
And Britain will save 3 billion pounds a year by cutting overseas aid spending to 0.5% of GDP, a level that remains higher than almost all other rich countries.
The Archbishop of Canterbury Justin Welby said the cut was "shameful and wrong", former Prime Minister David Cameron said the government had broken a promise to the poorest countries of the world, and the government's minister for sustainable development resigned.
($1 = 0.7499 pounds)
(Writing by William Schomberg; Editing by Catherine Evans and Jan Harvey)