Page last updated at 12:32 GMT, Wednesday, 21 October 2009 13:32 UK

Borrow for recovery, says Darling

Alistair Darling: ''Ending support now would be wrong and it would be dangerous''

Chancellor of the Exchequer Alistair Darling has said government borrowing is the best way to support the UK economy in the long run.

The chancellor admitted that borrowing "may feel counter-intuitive", but said in the longer run, it "will mean the bills we face as a country are lower".

There are concerns that government debt levels are too high and that tax rises and public spending cuts are needed.

Government borrowing has increased significantly during the recession.

In a question-and-answer session after the speech, Mr Darling said he agreed with the Bank of England Governor Mervyn King in saying there were "no simple answers" to reforming big banks.

Mr King said on Tuesday that some banks might have to split their core business from riskier practices, so they did not get too big to be allowed to fail.

Mr Darling said: "We cannot have a regulatory regime that excludes the possibility of failure."

He also said that more competition was needed in the banking sector, and that the government would be actively encouraging a greater competition when it sold its stakes in the banks it was forced to bail out during the financial crisis.

Government support

Referring to calls to cut back on borrowing and spending, Mr Darling said ending government support now would be "wrong and dangerous".

He said the country faced a choice.

"We can resign ourselves to a decade of austerity, low growth and low employment," he said in a speech in London.

"Or we can embrace change, turn it to our advantage and seize the huge opportunities a global recovery will bring."

He added that withdrawing government support to the economy "would put the recovery at risk and abandon people facing unemployment".

The government has pumped billions of pounds into the economy to try to stimulate demand during the recession, both directly through its £175bn quantitative easing programme, and indirectly by propping up banks and cutting VAT.

Planning for growth

But Mr Darling said there was still much work to be done. He outlined three main steps that need to be taken.

"First, we must support the economy until we're sure the recession is over. Some are tempted to think the crisis is over. It's not. Banks all over the world are still dependent on government support."

Second, the chancellor said the country must rebuild its financial strength by raising taxes and making "tough choices on public spending for the years ahead".

"That will mean cutting costs, cutting waste and cutting lower priority budgets, while continuing to invest in our priorities and our future," he said.

Finally, he said the government needed to plan for growth.

"Not only is growth the best way of creating jobs and increasing prosperity - it is also the best way to earn the money to pay down debt.

"We need growth, because when we grow, the economy becomes bigger, we all become richer as a country, and it gets easier to pay back debt."

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