Caution's the word, Bank governor warns Brown

Mervyn King said the Government was already running up significant debts and should be "cautious" before pumping more into the economy.

He told MPs: "The fiscal position of the UK is not one which says 'Let's just go on another significant round of fiscal expansion.'"

The governor's intervention came as the Prime Minister took off on a world tour to raise support for an economic stimulus package he hopes will be agreed at the London G20 summit next week.

Mr Brown is said to be piling pressure on Chancellor Alistair Darling to do more on top of the £20 billion fiscal stimulus unveiled in the autumn's Pre-Budget Report, which included the VAT cut.

But Mr King said it was too soon. "I'm sure the Government will want to be cautious," he said. "There is no doubt that we face very large fiscal deficits over the coming years." Mr King, who was giving evidence to the all-party Treasury committee, added: "I think it would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits." He was not against "targeted" measures but warned that the full effects of the existing £20 billion had not worked through the system.

His comments will strengthen Mr Darling, who has signalled that he does not plan spending rises or tax cuts designed to make people feel better off and more confident. Shadow chancellor George Osborne said the debate on the dangers of continued borrowing had reached a climax. Mr Osborne said the Tory position to oppose the VAT cut had been vindicated and the Mr Brown left isolated. He pointed out that former Labour minister Stephen Byers agreed the VAT cut had not worked and should be scrapped.

"The big debate in British politics about the recession has been whether or not the country could afford a debt-funded fiscal stimulus," said Mr Osborne. "This leaves Gordon Brown's political plans for the G20 and the Budget in tatters."

Mr King told the committee:

● Charges for accounts may return as high street banks are no longer making enough from interest rates on loans to cover costs.

● He was "mildly encouraged" by the Bank's policy of quantative easing. He made clear that interest rates would be raised at the first sign of inflation creeping back.

● It will be "many months" before the inter-bank lending rate comes down to lower levels. He also expressed irritation that high street banks were not yet lending to businesses and families, in breach of an agreement made in October.