The Chancellor signalled last night that taxes might have to rise if the economic downturn is prolonged.
Alistair Darling warned that Government revenue has collapsed because of the recession. He said that ministers would attempt to stimulate the economy by accelerating spending projects even if it meant a sharp increase in Government borrowing.
He is expected to announce plans today for a £4bn loan package designed to help small businesses cope with tough trading conditions ahead.
Mr Darling said: "People should be in no doubt that the Government will take the decisions necessary to ensure sustainability in the medium term [and] to return borrowing and debt to a sustainable level – once these current shocks have worked through – just as we have in the past."
Mr Darling, delivering the annual Mais lecture to the Cass Business School in London, admitted that tax receipts were under "extraordinary pressure" because of the crisis. "The credit crunch affects the tax take from the financial sector, which over recent years has been generating about 25 per cent of our corporation tax revenue," he said.
David Cameron, the Conservative leader, has accused the Government of triggering a slide in sterling by boasting of plans for a "spending splurge" in an attempt to combat recession.
But the Chancellor hit back at critics of Government plans to spend on public projects. "It is right to put money back into the economy when the private sector can't," he said. He insisted the national debt would not be allowed to run out of control. Nevertheless, tough decisions on taxes and spending appear certain to face the winner of the next election if the economy fails to recover rapidly.
Mr Darling confirmed that the Government's cherished "golden rule" controlling borrowing would be abandoned in order to fund the boost to public spending.
"To apply these rules rigidly in today's changed conditions would be perverse," he said. "The combination of the global credit crisis and the surge in commodity prices is unprecedented."
The Chancellor will set out fresh moves today to stimulate more lending to thousands of small and medium-sized firms struggling to keep afloat. He will announce that the European Investment Bank – the European Union's lending arm – will provide up to £4bn in loans to British firms over the next four years. The cash will be channelled through British banks.
The move will be confirmed after a meeting with Philippe Maystadt, the president of the European Investment Bank, as well as representatives of the major British banks and small companies. The initiative – which is part of a £24bn EU-wide package – follows a warning that high street banks are still reluctant to lend cash to business and industry.
The Government is also preparing action to clamp down on "debt factoring companies" who take on store card debts and then apply exorbitant rates of interest. About 5,000 people lost their homes last year as their debts to such companies mounted.
The Prime Minister, Gordon Brown, said: "I am aware of the problem. We are looking into it and I believe changes will be needed in practice."
The Treasury is expected to legislate to require such firms to be bound by the code of practice followed by the Council of Mortgage Lenders.
Amid growing speculation that further interest rate cuts are on the way, the FTSE 100 index closed more than 8 per cent higher, soaring 316.2 points to 4242.5 in the third-biggest rise in its history.
The rally – which followed similar rises on the Dow Jones Index – added around £76bn to the value of battered UK blue chips.
Global recession: Latest developments
* US Federal Reserve cuts keyinterest rate from 1.5% to 1%, the lowest level since 2004
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