LONDON (Bloomberg) - Chancellor of the Exchequer Alistair Darling predicted the UK economy may shrink by as much as 1.25 percent next year, the most since 1991.

He added that the UK will raise the income tax rate for people earning more than £150,000 ($227,000) to 45 percent in the fiscal year starting in April 2011.

And Darling also plans to reduce the UK's sales tax rate to 15 percent beginning on December 1, from 17.5 percent currently.

Darling scrapped his eight-month-old forecast that the economy would expand in 2009 as the global credit crunch hammered consumers and companies. He said British gross domestic product will contract in the first two quarters and begin growing again in the second half.

"These are extraordinarily challenging times," Darling said in his pre-budget statement yesterday to Parliament in London. "I'm confident the slowdown will be shallower and shorter than would have been the case" without the measures the government was taking, he said.

The forecast gives official weight to expectations of a recession that Prime Minister Gordon Brown publicly accepted for the first time a month ago and has built into speeches since. By predicting a return to growth in early 2010, Darling is betting the economy will pick up before Brown has to face voters in an election by June of that year.

Darling estimated in March the economy would expand between 1.75 percent and 2.25 percent this year and between 2.25 percent and 2.75 percent in 2009.

The last UK recession was in 1991. In his first budget on March 19 of that year, Chancellor Norman Lamont predicted the economy would contract two percent. Four months earlier, his predecessor John Major had predicted growth of more than two 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.

"Ordinarily with public finances in the very poor state that they are, the government would be highly unlikely to be enacting fiscal stimulus," said Howard Archer, economist at HIS Global Insight.

"But these are very, very far from ordinary times and the key issue is trying to ensure that a potentially long and deep recession does not develop into something even nastier."