Osborne: We need rate cuts not spending spree

SHADOW chancellor George Osborne called for swift interest rate cuts today and warned that Labour's plans for a "spending splurge" could damage Britain for more than a decade.

Mr Osborne hit out as Alistair Darling prepared to make a landmark City speech that is expected to confirm that the Treasury will try to spend and borrow its way out of recession.

The Chancellor was set to sound the death knell for Gordon Brown's own fiscal rules in which he attempted to keep debt down and balance the public finances. Mr Osborne claimed that the dumping of the fiscal rules would destroy "the final remaining pillar" of Labour's economic record.

In a significant hardening of the Tory Party's position on the financial crisis, he warned that "endless white elephant public works programmes" would do more harm than good in the long run.

Mr Osborne also broke with his practice of not commenting on Bank of England decisions on interest rates by instead calling for swift cuts to boost demand. Two "hawks" on the Bank's monetary policy committee last night signalled that they too now wanted rates cut.

In tonight's annual Mais lecture to the Cass Business School, the Chancellor was set to declare that the Government will follow its bank bail-out with a similarly bold approach to public finances, claiming that "just as markets change, so should policy". He was expected to say that policy on taxation and expenditure should reflect the "exceptional" circumstances of the credit crunch, while seeking to reassure the City that borrowing would be brought down in the medium term.

Mr Darling signalled that he wants other nations to follow Britain's lead with Keynesian-style boosts to public spending to combat the recession.

"Today, governments all over the world are using approaches that had until recently been consigned to policy making history, but it is natural that the conduct of policy should evolve," he was set to say. "Three weeks ago, we worked with other countries to put in place a plan to stabilise the banking system. These countries are committed to working together to strengthen supervision in the global financial system. And today we need the same determination to support the wider economy. To ensure that fiscal policy supports monetary policy, here and across the world."

Writing in the Daily Telegraph, Mr Osborne said the UK could suffer from decade-long economic decline should the Government increase spending by borrowing more. He said that would be "exactly the wrong approach", adding: "The policies that got us into this mess cannot be the ones to get us out of it."

The fiscal rules, now likely to be officially ditched in the forthcoming pre-Budget report, were introduced by Mr Brown as chancellor in 1997. They require the Government only to borrow to invest over an economic cycle and to keep debt below 40 per cent of national income.