Alistair Darling has accepted that a second emergency package of tax and spending measures may be needed in this spring's budget to claw the economy out of a deepening recession, the Guardian has learned. Despite the deterioration in the public finances, the chancellor is willing if necessary to borrow more money to help strategically important industries and to help lay the foundations for economic recovery. He will start work this week on plans for a British answer to Barack Obama's green jobs agenda.
Short-term help is likely for the stricken car industry, but Darling has signalled to his officials that he is also prepared to use his second budget to improve Britain's infrastructure and boost sectors such as environmental technology, pharmaceuticals and the creative industries. Tougher regulation of the banks will also be unveiled.
Darling rejects claims from the Conservative leader, David Cameron, that the cut in VAT to 15%, introduced last month, has flopped but accepts that the speed and severity of the downturn may require additional action.
Treasury insiders said work on last week's measures to boost bank lending meant planning for the budget had only just started and that no precise plans had yet been made. They stressed that any budget boost would depend on the state of the economy and be far more modest than the fiscal plans being drawn up in Washington.
Obama hopes to persuade Congress to approve measures that would cost around $800bn (£586bn), around 5% of US GDP and are designed to create 4 million jobs in the world's biggest economy.
The VAT holiday and other measures announced in the pre-budget report came with a £20bn price tag - just over 1% of UK GDP - and Darling is wary of alarming the financial market by unveiling measures seen as too costly. "A 4% to 5% of GDP boost is highly unlikely," one source said.
But with Gordon Brown to press fellow world leaders for co-ordinated reflationary action at the London summit of the G20 in early April, Darling has spent the last few weeks thinking of possible new expansion plans for a budget tentatively scheduled either for early March or after the visit of Obama to the G20 meeting.
Sources said the shape and scale of the budget would depend on the Treasury's forecasts for the economy, but Darling has already acknowledged there is no chance of the 1% contraction predicted in the PBR. The fallout from the autumn's financial meltdown meant the economy shrank by a sharper than expected 1.5% in the final three months of 2008 and the Treasury believes 2009 will see a decline of between 2% and 3% in GDP.
Although the chancellor believes there is still a chance that Britain's flexible economy and the stimulus from lower interest rates, tax cuts and falling energy prices will lead to recovery later this year, there is also concern that growth in 2010 will fail to meet the government's 1.75% forecast.Amid fears that even the lowest interest rates in history will be insufficient on their own to lift the UK swiftly out of its trough, the Treasury and the Bank of England will this week reveal details of proposals that would allow Threadneedle Street to flood the economy with cash.
Weaker growth will result in public borrowing exceeding the £118bn pencilled in for the 2009-10 financial year in the PBR and the fresh fiscal boost in the budget will be accompanied by plans to raise taxes or trim expenditure once the crisis is past. "If we do more there has to be a sensible plan for fiscal consolidation," one source said.
Drawing on his time as industry secretary, Darling has told officials he is attracted by the idea of using the budget to help reshape the economy, which in the run-up to the recession was heavily dependent on two sectors - finance and housing.
This year's budget will be the first to contain a UK carbon budget and the chancellor wants to support green jobs through capital programmes, spending on better home insulation and the encouragement of low carbon technologies.
The Treasury is also working on proposals to help the car industry. Measures under consideration include an expansion of the asset-backed guarantee scheme for mortgages to car loans and the purchase of corporate bonds to help boost cash flow.
Darling has asked the chairman of the Financial Services Authority, Lord Turner, what needs to be done to improve the regulation of banks in the wake of the credit crunch.
Copyright Speakers Corner 2016