April 22 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling forecast the worst recession in the U.K. since World War II as the banking crisis and rising unemployment curtailed spending and revenue to the Treasury.

The government expects the economy to shrink by about 3.5 percent this year, more than twice the estimate in November for a slump of no more than 1.25 percent, Darling told Parliament in London today. He expects growth of 1.25 percent in 2010.

“No country can insulate itself from this worldwide downturn,” Darling said. “I expect the economy to start growing again towards the end of the year.”

The comments indicate Darling may boost borrowing and sales of government bonds to fund the budget deficit. The Treasury already is estimating it will sell a record 146 billion pounds ($213 billion) of bonds this year, more than double the amount in each of the past five years.

Darling will discuss his deficit forecasts later in today’s speech. Prime Minister Gordon Brown’s administration has pledged support for homeowners, people who lost their jobs and small businesses to soften the impact of the recession. Trailing the Conservative opposition in polls, Brown must call an election by the middle of 2010.

GDP Comparisons

The new estimates bring the Treasury into line with other forecasters. The Organization for Economic Cooperation and Development expects contractions of 4 percent in the U.K., 4.3 percent in the U.S., 6.6 percent in Japan, and 4.1 percent in the nations sharing the euro.

Earlier, Darling told the Cabinet the slump would be the worst since World War II, according to Michael Ellam, a spokesman for Brown.

“The chancellor said we were facing a global downturn, one that is unprecedented since the Second World War,” Ellam said. “Of course Britain, being an open economy, with a large financial sector, cannot be insulated.”

Britain’s 25 billion pounds of stimulus to date cost the government 1.4 percent of GDP this year, less than the programs worth 2 percent in the U.S. and 1.5 percent in Germany, the International Monetary Fund says.

Yesterday, the Treasury said it will keep a lid on the deficit by saving 15 billion pounds through cost cuts and efficiency measures.

The worst of the recession may already be over, according to the Confederation of British Industry. A gauge tracking service industries in the U.K. rose to a six-month high in March, and mortgage lending has increased. For Darling, making such a prediction would be risky, said Robert Chote of the Institute of Fiscal Studies.

‘Cautiously Optimistic’

“Saying it would be tempting fate,” Chote said before Darling’s speech. “He will want to be cautiously optimistic and not to give any hostages to fortune.”

The last U.K. recession was in 1991. In his first budget on March 19 of that year, Conservative Chancellor Norman Lamont predicted the economy would contract 2 percent. Four months earlier, his predecessor John Major had predicted growth of more than 2 percent. Subsequent data revisions showed the economy shrank by 1.4 percent.

This time the downturn is being driven by slumping house prices and the financial crisis. Brown and Darling have pledged to step up borrowing even as the budget deficit swells, to fund tax credits and spending that are intended to ease the impact of the recession on the economy.

For now, unemployment is still rising. U.K. joblessness rose to 2.1 million in the quarter through February, the highest since Brown’s Labour Party came to power in 1997, the Office of National Statistics said today.

“We will continue to do everything we can to help people into work and help people into jobs,” Brown told lawmakers before Darling spoke today.

To contact the reporters on this story: Mark Deen in London at markdeen@bloomberg.net

Last Updated: April 22, 2009 07:45 EDT