Spending won't stop the slump, warns City

In the spirit of John Maynard Keynes, Alistair Darling has pledged to bring forward billions of pounds of spending to invigorate the economy in a dramatic raid on future budgets.

The Chancellor intends to fast-track construction of schools, hospitals and housing as the country this week braces itself for confirmation that the economy is shrinking for the first time since the recession of the early 1990s.

But economists warned the Chancellor's plan would not prevent recession and could store up problems for the future, given the parlous state of the public finances.

Howard Archer of Global Insight said: "The economy needs all the help it can get but the problem is it is going to store up problems for later on. The public finances are already in a mess and this is going to make it worse. But the other argument is that if they don't do this, the economic downturn will be even worse, and that will hit the public finances."

David Buik of BGC Partners said: "For the UK government to adopt John Maynard Keynes' economic policies, which came to the fore in the early Thirties, as a remedy for pulling the UK economy out of a deep-seated recession in 2008, is absolute madness.

"Do they not understand that the endemic problem that has destroyed the fabric of our economy and society is the fact that government and consumers are overborrowed? Why fuel the flames of economic capitulation? This country is not in the position to service gargantuan debt." Darling will call on Government departments to bring forward capital expenditure from planned budgets in 2010-11, with focus on supporting business and jobs in the construction industry. In the recession of the 1930s, Keynes urged the use of public money to finance job creation.

"Much of what Keynes wrote still makes sense," said Darling. "You will see us switching our spending priorities to areas that make a difference. Housing and energy are classic cases where people are feeling squeezed." Simon Hayes of Barclays Capital said: "It will help particularly if the spending is concentrated on areas of the economy where supply capacity is weak. Any help the Government can provide there will assist the economy both in the short term and the longer term."

George Buckley of Deutsche Bank said: "This is necessary, it's helpful, but it is not going to stop a severe recession."