Jeremy Warner's Outlook: Chancellor delivers a Keynesian boost

It has long been apparent that the Labour Government is heading into much rougher economic waters than the benign conditions enjoyed through most of its 11-year rule.

Alistair Darling, the present incumbent, has been forced to learn Mr Clarke's wisdom the hard way. Yesterday's package of measures to address the political damage done by the abolition of the 10p income tax rate still leaves 1 million losers, and that's before anything the Chancellor does next year to get the tax giveaway back.

Yet there is also a thinly disguised economic purpose in the climbdown. The £2.7bn cost of raising tax allowances for basic-rate taxpayers is a big sum of money which will have a pronounced reflationary effect at a time when the economy certainly needs it.

There's no comparison with the $156bn of tax rebates being pushed through by the Bush administration in the US, but it is a similar sort of thing which, because it specifically benefits the lower paid, will be doubly pleasing to Labour loyalists.

This is of course money the Chancellor doesn't have. We'll have to wait to see how and when he intends to claw it back. Or maybe he's taken the view that the public finances are already such a busted flush that it's not worth worrying about any more.

With angry voters to face in next week's Crewe by-election, the Government's reputation for prudent management of the public finances has been sacrificed to political expediency.

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