Credit crisis: Labour's economic record may have to be revised

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Gordon Brown built his formidable political reputation over a decade on his prudent stewardship of the economy as Chancellor.

Alistair Darling now faces a challenge as daunting as any experienced by his predecessor during his time at the Treasury: how to deal with a crisis caused by profligate lending on the other side of the Atlantic.

Mr Darling, supported by senior figures in the banking industry, toured the television and radio studios yesterday to urge calm over the plight of Northern Rock after it was forced to ask the Bank of England for an emergency loan.

He insisted: "People can use their accounts in the usual way. They can carry on making their mortgage payments in the usual way. Northern Rock will be able to carry on in business."

His immediate objective was to stem panic over the problems at the bank and dampen fears that the turmoil over the America sub-prime mortgage market could spread to other British lenders. As worried savers queued outside Northern Rock branches around the country to withdraw their money, the initial signs were not good.

Ministers will also fear that the Government's hard-won electoral credit over its handling of the economy could soon ebb away if the emergency deepens.

The chance of an election on the back of a so-called "Brown bounce" within the next year could also recede, particularly if Government competence is questioned over the outbreak of foot-and-mouth disease.

A poll yesterday, however, paradoxically concluded that voters would cling on to Mr Brown were economic problems to mount.

It found 61 per cent would prefer him and Mr Darling to run the economy, compared with the 27 per cent who would opt for David Cameron and George Osborne. Even one-quarter of Tory supporters and two-thirds of Liberal Democrat supporters preferred the Labour team.

The Prime Minister's official spokesman stressed yesterday that the "fundamentals of the economy" remained sound, citing high economic growth, low inflation rates and record numbers of people in work.

Asked if Mr Brown was glad he was no longer at Number 11, the spokesman replied: "When he was Chancellor, he dealt with a whole series of instances of financial instability."

The opposition parties have struggled for years to lay a glove on the Iron Chancellor. But with jitters in the housing markets, fears of further interest rate rise and petrol prices about to reach £1 a litre, they sense an opportunity to undermine confidence in the new Prime Minister's fiscal expertise.

Mr Osborne said the Tories supported the Bank of England's intervention to prop up Northern Rock, Britain's fifth largest mortgage lender.

He added: "It is important in times of financial turbulence we stick to the facts and don't get carried away with speculation.

"There is, however, a more fundamental question of why Gordon Brown allowed the creation over ten years of an economy built on debt, with consumer borrowing trebled and the largest budget deficit in Europe, in a way that threatens the broader stability of the economy. I have always said stability should come first."

Michael Fallon, a Tory member of the Treasury select committee, added: "It's his [Mr Brown's] credit boom and it looks as if he has failed to regulate it properly."

Lord Oakeshott of Seagrove Bay, a Liberal Democrat treasury spokesman, accused the banks of reckless lending. He said: "Brown has been in denial as debt got out of hand. Now millions of families will see real mortgage pain."

But both the Prime Minister and the Chancellor stressed that Northern Rock was not insolvent and that the Government had a welL-established system for dealing with periods of financial instability.

Mr Brown's spokesman said: "As the Treasury and the Chancellor have been making clear, the Financial Services Authority has judged that Northern Rock is solvent. This is not an issue about the solvency of Northern Rock.

"There are facilities in place to provide support of this kind and, as the Chancellor has said, Northern Rock is the only institution that has approached the Bank of England to request support of this kind."