LONDON - The British economy will slow next year and borrowing will go up, finance minister Alistair Darling said on Tuesday as he tried to regain the initiative on tax after his Labour's Party's poll lead dwindled in the last week.

Cutting next year's growth next forecast to 2.0 to 2.5 percent, Darling said the government would have to borrow 10 billion pounds more this year and next, but promised the state health service and education would get a big cash boost.

He also tried to steal the opposition's newfound thunder by raising the inheritance tax threshold for couples, using his first pre-budget report to parliament to propose taxes on wealthy foreigners and getting airlines to pay the cost of pollution, not passengers.

But the scale of the giveaways were small and were in any case be offset by a fiscal tightening in later years as Darling also moved to close loopholes that allowed private equity bosses to pay less tax.

"As always, Chancellors can only achieve what the economy allows. We may be entering a new period of hard problems and hard choices," said Roger Bootle, economic adviser to Deloitte.


NO ELECTION

Prime Minister Gordon Brown was forced to rule out an election this year despite weeks of government whispers that he might try to capitalise on a huge poll lead by calling a contest three years earlier than he must.

His opinion poll lead narrowed sharply, however, after the Conservatives issued proposals to cut inheritance tax and duty for first-time buyers and the opposition have accused him of cowardice for backing off from an early election.

On Tuesday, they said Labour was now stealing its clothes.

"Let there be no doubt who is winning the battle of ideas," the party's finance spokesman, George Osborne, told parliament. "He should have called that election and let us give the budget."

Darling blamed the weaker growth on the global economy, labouring under a credit crisis, citing "increased international economic uncertainty and a more fragile global environment".

The economy would still expand by 3 percent this year before slowing in 2008 only to rebound again in the year after, he said.

Borrowing, however, would be higher. Public sector net borrowing would be 38 billion pounds, not 34 billion.

Economists said the government may have to issue more bonds in coming years and might face its hands tied before an election now expected in 2009, though cuts in corporation tax and income tax will already come in next year.

"Lower growth plus tax cuts equals higher deficits," said George Buckley, chief UK economist at Deutsche Bank.

The new finance minister also closed an unpopular tax break for private equity bosses by enacting a single 18 percent capital gains tax and getting rid of taper relief.

And he responded to Conservative proposals to target foreigners living in the UK who claim a "non-domiciled" status to escape tax by proposing they pay a charge after seven years.

As expected, the greatest largesse was for the state health service which would see its funding rise to 110 billion by 2010.