Banks shamed as Treasury acts to help small firms

Osborne denies that plan to ease credit logjam represents a Plan B

The Government will bypass Britain's foot-dragging banks by injecting tens of billions of pounds into struggling small firms in an attempt to head off a "double-dip recession". After finally losing patience with the banks over their reluctance to lend to businesses, George Osborne announced yesterday that the Treasury would underwrite loans for Britain's small and medium-sized firms by buying corporate bonds or "business IOUs".

The loans will be cheaper than those offered by the banks. Aides said the aim was to prevent another credit crunch but the move also reflects growing fears among ministers that the global economic slowdown could push the UK back into recession.

The Chancellor's aides denied that his "credit easing" proposal amounted to a Plan B on the economy and that his Plan A was not working. They also insisted that it would not increase Britain's deficit.

Mr Osborne also risked further damaging David Cameron's green credentials by announcing that Britain would not set a higher target to cut its carbon emissions than the rest of Europe. The UK is leading calls for the EU to cut emissions by 30 per cent from 1990 levels by 2020. The current goal is a 20 per cent reduction and Britain will now stick to that unless EU states "jump together" and opt for 30 per cent.

The Chancellor said environmental laws and rules were adding to the energy bills of households and companies. "Britain makes up less than 2 per cent of the world's carbon emissions to China and America's 40 per cent. We are not going to save the planet by putting our country out of business," he said.

He provoked another controversy by announcing that people claiming unfair dismissal will have to pay up to £250 to make a claim and a fee of £1,000 or more if there is a full employment tribunal hearing. The charges, which would be refunded if the employee wins, will also apply to sex-discrimination actions. Mr Osborne refused to change his cuts strategy, rejecting Tory demands for tax reductions to boost growth and Labour and Liberal Democrat calls for higher spending. Ten minutes into his address, the rating agency Standard & Poor's confirmed the UK's AAA credit rating. But it warned that the cuts could inhibit growth and was gloomy about growth and jobs.

The Chancellor said: "I don't pretend to you that... there are not difficult days ahead. But together we will ride out the storm and together we will move into the calmer, brighter seas."

His most significant measure was the move to help small firms. Although full details will not be set out until his autumn statement next month, the "credit easing" plan could be implemented by the Bank of England on an emergency basis if the eurozone crisis deepens.

The new scheme may be run by the Bank or an arms-length body. The Treasury will create a US-style market but will not "pick winners", as the private sector will vet firms applying for the new loans. Although the Treasury would be liable if a company defaulted on a loan, officials said any losses would be covered by interest received on other loans.

The move means the Treasury will avoid a difficult annual negotiation over lending targets for the banks, before waiting anxiously to see if they have been met. Critics said it was a sign that the present agreement, called Project Merlin, had failed.

The Institute for Fiscal Studies warned that the full programme would not boost growth in the short term.

John Walker, national chairman of the Federation of Small Businesses, said: "The credit-easing measure announced today could be a significant development that would open up a new finance stream to viable businesses."