Andrew Grice: A cool Chancellor must consider putting up taxes

When Britain gave an honorary knighthood to Alan Greenspan, the former chairman of the US Federal Reserve, it recognised his "contribution to global economic stability". A beaming Gordon Brown told his economic guru: "You have been a great force for the advancement of the world economy and a great friend of the UK."

Mr Greenspan, who might now win an award for creating global economic instability, admits the credit crisis revealed a "flaw" in his market-knows-best ideology, as it was based on the banks being the best people to protect their own shareholders.

Mr Brown, now leading the charge for much tighter global financial regulation, punctuates his sentences by describing the crisis as "made in America". He doesn't mention the flawed regulatory system he created in Britain in 1997 and our personal debt mountain. Conversely, the Tory Opposition suggests the crisis is home-made. Labour and the Tories mislead us, since both foreign and domestic factors are at work.

Whatever the causes, the Chancellor, Alistair Darling, will outline on Monday how he will try to get us out of the mire. It is no exaggeration to describe his pre-Budget report as the most important economic and political statement since Labour came to power. The Chancellor wants to act big to keep the recession "short and sharp". But he knows that his "fiscal stimulus" (tax cuts and a boost to state-funded building projects) must be credible to prevent a further run on the pound; to ensure further interest rate cuts, and even to allow the Government to keep borrowing. So he must take corrective action (tax rises) in the medium term to bring borrowing under control.

Mr Brown is breathing down Mr Darling's neck. That doesn't mean he has his hands round it, even if the joke among Treasury officials is that Chancellor Brown would have torn to shreds some of the ideas he is now putting up as Prime Minister. Mr Darling is a much stronger political animal today than the frightened rabbit who did what he was told by Mr Brown in last year's pre-Budget report.

There have been some differences about how to achieve what the Chancellor and Prime Minister both want. Nothing unhealthy about that. Mr Darling likes to deploy the Treasury's best brains to think deeply about policy. "Under Gordon, the two Eds [Balls and Miliband] decided what they wanted and the Treasury delivered it," one insider said. Two Eds may be better than one, but Mr Darling trusts his civil servants more than his predecessor at the Treasury.

Despite the weight on his shoulders, the Chancellor remains remarkably calm. He doesn't kick the cat, even though very few visitors to his office bring him good news on the economy. Sometimes there are several grim tidings in one day.

Mr Darling will need no prompting by Mr Brown to use his mini-Budget to outmanoeuvre the Tories – by cutting taxes and reducing the spending totals for future years. This will make it harder for David Cameron to implement the significant new policy he announced this week: to spend less than Labour by 2010-11 so that the tax cuts become permanent.

Mr Cameron and George Osborne were sure that ministers would respond to their decision not to match Labour's spending with shrieks of "Tory cuts" in public services. Mr Brown saw this as a trap, sensing that voters are now more worried about the recession than public services. So he ordered a more potent line of attack, branding the Tories as the "do nothing now" party.

Although he won that skirmish, Mr Brown should admit that taxes will rise in future years to pay for the anti-recession package we need now. Other ministers, including Mr Darling, have done so but he has dodged the question. He looks in denial. A bit more honesty would be a good thing; voters know they can't have it both ways.

The Prime Minister wants the spotlight to be on Labour's tax cuts. Whether people spend them is another matter. Yet the more important challenge for Mr Darling is to unblock the banking system. Mr Brown's much-trumpeted "rescue" looks in need of a lifeline itself because the banks are barely making new loans to businesses or home-buyers. Remember: the billions they hold dwarf the "fiscal stimulus" you will hear so much about in the next few days. As Vince Cable, the Liberal Democrat wise owl who predicted the debt crisis long before Mr Greenspan and Mr Brown acknowledged it, said: "It's the banks, stupid."

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