The Confederation of British Industry and three of the Government's own independent economic advisers urged the Chancellor to cut interest rates. The CBI also said that there should be no rise in taxes in the Budget.
Labour accused the Prime Minister of replying to the growing crisis of joblessness with a mixture of panic and public relations gloss.
The pound fell sharply for a second successive day on speculation that the Chancellor will soon yield to the mounting political and industrial pressure to revive flagging hopes of an upturn.
The number of people out of work and claiming benefit rose by 60,800 in December, the sharpest increase for 18 months and far higher than City forecasts. This was the 32nd consecutive monthly rise and took the jobless total to 2,973,500, adjusted for normal seasonal changes.
The unemployed are now 10.5 per cent of the workforce, the highest level since February 1987. Officials believe that January's figures - compiled last Thursday - will show that unemployment has already topped 3 million for the first time in six years.
Although unemployment lags behind economic activity, there was also bleak news on output. Factory production fell by 0.5 per cent in November, largely because of stalled car production. Falling steel output in recent weeks suggests that manufacturing remained depressed in December.
The Treasury said that the figures referred to last year, and so did not imply that the recession was still deepening. But three of the 'seven wise men' appointed by the Chancellor to give him independent advice on the economy - Professors David Currie, Wynne Godley and Patrick Minford - called for immediate rate cuts. Professor Minford said: 'Once again, interest rates are falling too little, too late'.
Sir David Lees, the chairman of the CBI's economic affairs committee, said: 'Lower interest rates would ease businesses' cash flow and encourage capital spending directly, as well as encouraging the consumer.'
John Smith, the Labour leader, challenged government complacency over the 'horrendous' increase in unemployment but in sharp Commons exchanges John Major insisted that the preconditions for a long-lasting solution - low inflation and 'wide-ranging help for the unemployed' - were already in place.
However, the Prime Minister's office also said that a special new Cabinet committee to review the effectiveness of existing schemes to help the unemployed met for the first time yesterday. The committee, chaired by Lord Wakeham, Leader of the House of Lords, included Gillian Shephard, Secretary of State for Employment, Michael Heseltine, President of the Board of Trade, and Michael Portillo, Chief Secretary to the Treasury. Other departments - Education, Environment, Social Security, Scotland and Wales - were represented by junior ministers.
Mrs Shephard said: 'The Prime Minister has asked me to work very closely with colleagues throughout Whitehall to ensure the maximum co-ordination and effectiveness of our effort.' But she did not announce new measures in addition to those already taken in the Autumn Statement.
Frank Dobson, Labour employment spokesman, said: 'After 14 years of sloth and complacency about unemployment, they have finally set up a committee of second-raters and second-rankers to look at the issue. The complacency has been replaced by a combination of panic and public
In the Commons, Mr Smith said the nation was tired of the Government's 'feeble and lame excuses'. Mr Major urged him to face economic reality - 'that you get inflation down and competitivity up. And those are the policies that we are pursuing.'
Employment Department officials said the trend rise in unemployment had accelerated to about 40,000 a month, as victims of recent redundancy announcements joined the dole queue. City analysts believe unemployment could rise through the year, far surpassing the 3,124,000 peak in 1986. They fear further rises in unemployment will undermine consumer confidence.
Hopes of lower interest rates saw the pound fall 2.42 cents to dollars 1.5153 and 2.53 pfennigs to DM2.4523. Rate hopes also lifted share prices, with the FTSE index of 100 leading company shares rising 24.6 points to 2,773.3.
The money markets implied that there would be a cut of half a percentage point in bank base rates to 6.5 per cent at the time of the March Budget, but the Treasury is aware that cutting interest rates could conflict with its 4 per cent ceiling for the growth of cash in the economy.
For the first time in nearly three years, the amount of cash is on course to exceed its target this month, figures showed yesterday.
The case for lower rates was weakened by the British Chambers of Commerce, which reported that business confidence had shot to its highest level since last April as export sales put on the strongest performance in two and a half years and hopes grew of a steady improvement in homes market.
But the BCC's quarterly survey also said that large British companies are set to maintain their heavy cuts in jobs in the next few months with only one in five companies working to full capacity.Reuse content