British Prime Minister Gordon Brown defended a surge in government borrowing on Monday, saying it is right to spend to help businesses and households when the economy is contracting.
Analysts expect the Labour government to change its limits on borrowing soon to allow more room for manouevre as the economy weakens, but the Bank of England has warned that any damage to the credibility of fiscal policy could make its own job harder.
"The responsible course of government is to invest at this time to speed up economic activity," Brown told business leaders. "As economic activity rises, as tax revenues recover, then you would want borrowing to be a lower share of your national income."
Data on Friday showed the British economy shrank for the first time in 16 years in the three months to September. Business minister Peter Mandelson said on Monday many Britons had yet to appreciate the full weight of what lies ahead.
"We are facing an unparalleled financial crisis," Mandelson told reporters in Moscow. "I dont think people have yet realised what the impact is going to be on our real economy, on businesses and jobs back at home."
"What we have got to do as a government is decisively to intervene in markets, stabilise the banking system and get lending going again so that the economy can be nursed back to health as rapidly as possible."
Gloom deepened on Monday when British engineering firm GKN Plc said it would lay off all 1,400 of its temporary staff while the pace of decline in house prices in England and Wales accelerated to 7.3 percent in the year to October.
Britons' expectations of the future rate of inflation crumbled in October as recession fears bit deep, a survey showed on Monday, giving the Bank of England more leeway to cut interest rates.
A survey by YouGov/Citigroup showed the public's expectation of inflation in 12 months' time fell to 2.9 percent from 4.4 percent in September. That was the biggest monthly decline since the survey began in 2005 and took inflation expectations to their lowest level this year.
The survey also showed a fall in Britons' expectations of inflation over the longer term. Expectations for the next five to 10 years fell to 2.9 percent in October from 3.5 percent in September.
CRITICISM
Brown's government, which lags the opposition Conservatives in the polls, has pledged to spend more to help people survive economic hardship as well as to provide billions of pounds to prop up ailing banks.
The plans have been criticised by some analysts for piling on new debt without any guarantee of success.
In a letter to Britain's Sunday Telegraph, academics and leading economists for financial firms Lloyds TSB and Invesco said the spending risked seriously misallocating resources and stunting any recovery in the private sector.
Asked why the Bank of England had not cut interest rates more aggressively to counter the downturn, Brown stressed the bank's independence but said monetary policy had a "role to play" at this time.
"I think you saw from what the governor (Bank of England Governor Mervyn King) said a few days ago that he appreciates that the real difficulty we face now is the impact of the credit crunch on the economy as a whole," he added. The Bank of England cut interest rates this month to 4.5 percent from 5 percent and speculation is growing that policymakers will repeat that move in November.
Brown said he would bring forward "other measures where necessary" to make sure banks lent to small businesses.
He also said Britain would make proposals "right across the board" at a G20 meeting in Washington on Nov. 15, which will bring together advanced industrial economies and developing nations such as China and Brazil.
"We are trying to achieve an early warning system for the world economy, a means of preventing crisis," he said.
Brown will hold talks in London on Thursday with German Chancellor Angela Merkel before European Union ministers discuss the bloc's position at a summit on Nov. 7.
In a statement issued before the meeting, Brown's office said he wanted further reform of the market for credit default swaps — a type of insurance against firms failing to repay loans — but it gave no details.
