January 7, 2009 2:00 am

Darling in new alert on depth of recession

Alistair Darling warned yesterday that Britain was "far from through" the recession, in a clear signal that he will have to abandon the government's forecast that the recovery would start in the second half of this year.

In an interview with the Financial Times, the chancellor repeatedly used the word "difficult" to describe the outlook, after economic data suggested his forecasts last November were over-optimistic and will have to be revised in this spring's Budget.

"In the current climate, no responsible finance minister could say that's the job done, far from it," Mr Darling said. "We are far from through this."

November's forecasts said Britain should now be at the midpoint of a one-year recession. Mr Darling said those projections were "based on the evidence we had at the time".

He added: "This year is going to be difficult. There are going to be some tough calls."

The Bank of England is tomorrow expected to respond to the slump by cutting interest rates to their lowest point for 300 years, which could provoke tension with the Treasury and ultimately threaten its independence.

Mr Darling said that if rates fell close to zero, the central bank and Treasury would have to work "hand in hand", since any operations by the Bank of England to print money would have to be authorised by him. His stance will disappoint many at the central bank who wanted to be given authority by the Treasury to operate quantitative easing - creating money to buy assets - within parameters agreed in advance.

Mr Darling insisted the government's £20bn fiscal stimulus was the right way to help the economy and the Conservative plan to cut public spending by £5bn next year was "utter madness".

He would look to the Budget to "see what else I can do to support the economy", suggesting he would consider measures that added to Britain's projected £118bn deficit next financial year.

The chancellor expects to announce a package of measures to support bank lending to business within the next few weeks.

He will today call for new measures to toughen global financial regulation, warning that the world's capital markets would remain frozen and protectionism could be fuelled unless further action is taken.

After years of championing light-touch regulation, the UK will use its chairmanship of the G20 group of leading economies and developing nations to promote more active regulation.

Mr Darling will write to G20 colleagues today proposing measures, ahead of a London summit in April, including giving regulators wider powers to ban banks from using business models that cause systemic risk.

He will propose liquidity rules and the setting of consumer protection standards forgroups wanting to operate across borders.

Interview, Page 3 John Redwood, Page 13 www.ft.com/darling

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