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Gordon Brown moved yesterday to reassure markets that he will not preside over a reckless increase in borrowing during the recession and will reduce debt as a proportion of GDP once the economy picks up.
As the Tories intensified their attacks on the government, the prime minister denied it was irresponsible to increase borrowing to kick-start the economy.
Brown was speaking as the Treasury finalised plans to rewrite the prime minister's fiscal rules which have governed his approach to the economy over the past decade. Alistair Darling will use his pre-budget report next month to say it is time for a more flexible approach in the economic cycle which started in 2006-07.
"The rules were useful. But the financial crisis is such a large shock you will see other countries taking a more flexible approach and not having a framework that applies so rigidly," one government source said.
The government will deny that it is making a U-turn as it amends the "golden rule", which says the government can only borrow to invest over a cycle, and the sustainable investment rule which says debt must be no more than 40% of national income.
It will say that the rules were right for the last economic cycle but they are not appropriate for the new cycle, which began in 2006-07, not least because the world economy has been so badly shaken by the banking crisis.
Amid criticism from centre right economists that the government is resorting to a traditional Keynesian spending programme in the face of the downturn, Brown insisted yesterday he would not borrow recklessly. In a question and answer session at Imperial College London, he said: "We will and can allow borrowing to rise to help restore demand and to come to the aid of workers, businesses and homeowners ... The responsible course is to borrow now to maintain growth and output, and to reduce borrowing as a proportion of GDP as the economy recovers and tax receipts rise again."
Brown and Peter Mandelson served notice that Britain should brace itself for a major downturn when they warned of rising unemployment. Brown said: "I can't promise people that we will keep them in their last job if it becomes economically redundant. But we can promise people that we will help them into their next job."
Mandelson was blunter. "We are facing unparalleled financial crisis," the business secretary said during a visit to Moscow. "I don't think people have realised what the impact is going to be on our real economy, on businesses and jobs back home."
David Cameron said he accepted the need to increase borrowing in a downturn. But he said Brown had left the public finances in a weak position by borrowing so much during the upturn. "The prime minister is pulling a gigantic con trick. He is saying I have got this great plan, I am going to borrow lots of money to get us out of recession. But this borrowing is not going to get us out of recession, this borrowing is because of all the mistakes he made even before we got to the recession.
"He is not planning to increase spending in any meaningful way other than, tragically, on the amount of unemployment there is going to be. This is not a man with a plan. It is a man with an overdraft."
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