Darling warns ministers: 'Credit crunch will mean spending cutbacks'

In an exclusive interview with the Daily Mail, the Chancellor delivered an uncomfortable Christmas message to his colleagues.

He left them in no doubt that Whitehall departments and public sector workers will have to tighten their belts as the economic slowdown bites.

"In the present climate my colleagues will have to understand they are going to hear "No", more and more.

"We in ten years, thanks in large part to Gordon Brown, have built the most stable economy in the world.

"I will do absolutely nothing to prejudice that, even if it means I have to take unpopular decisions."

His comments will worry ministers and disappoint police who are battling with the Home Office over their claim for a pay deal over the 2 per cent ceiling imposed on the public sector.

Mr Darling said he was confident the economy could withstand the pressures of the global credit crisis and continue to grow.

And he rejected claims that Treasury policy is dictated by Gordon Brown, following complaints that his independence has been undermined.

Mr Brown and Mr Darling staged a show of unity to reassure the markets at the Prime Minister's last press conference of the year.

They kept open the possibility of nationalising Northern Rock, and refused to give a categorical guarantee that every penny of the £60billion in taxpayer cash pledged to the ailing lender will be repaid.

Mr Darling said: "It is tough being Chancellor in these times but you have to do what is right."

The Government's budget deficit rose to £24billion in the first five months of the financial year as tax revenues from the City and business slowed.

Most analysts believe it will be all but impossible for Mr Darling to meet his target of holding borrowing to £38billion this year unless he can keep a tight grip on spending.

He questioned whether the British public would rather have a larger pay increase or face ever higher mortgage payments.

Unless public sector pay is held to the 2 per cent limit proposed by Mr Brown, "short-term decisions on wages would end up with people losing much more than any pay increase on paying their monthly mortgage", Mr Darling said.

He warned the public that in 2008 Britain faces "uncertain testing times".

But added: "I remain optimistic that the economy is fundamentally strong."

Despite the developing squeeze on consumer and business lending, Mr Darling said he saw no reason to reset the growth forecast which he lowered to 2-2.5 per cent in the Pre Budget Report in October.

But he did not rule out revisiting the figures in his first full budget in the spring.