Keep spending - Darling warns G20 against complacency

International complacency risks plunging the world into a double-dip recession, the Chancellor, Alistair Darling, warned yesterday.

In a stark message aimed at Germany and France, which want the G20 leading nations to discuss "exit strategies" from measures to stimulate their economies, Mr Darling insisted that governments must carry on spending to ensure the global economy returns to sustainable growth next year.

"My view is that the biggest single risk to recovery is that people think the job is done," Mr Darling said in an interview with The Independent.

"There is a real risk that either governments or people generally think 'We have done that, we are on the path to recovery'."

Mr Darling is due to attend a meeting of G20 finance ministers in London tomorrow and on Saturday, before leaders including Gordon Brown debate a global recovery compact in Pittsburgh in three weeks.

Britain fears that Germany and France, who have returned to growth ahead of Britain, will push for a rapid decline in stimulus spending to appease public opinion and reassure financial markets that they are moving to balance their books.

Instead, Mr Darling wants the G20 to take measures to combat unemployment similar to Britain's £5bn jobs package to ensure that the return to growth does not fizzle out.

"There are encouraging signs that the joint action we have taken in the last 10 months or so is having an effect," said Mr Darling. "We are beginning to see the fruits of that action. But it is too early yet [to abandon it]. We must not get ahead of ourselves."

Pointing out that the fiscal stimulus packages which had been agreed by individual governments were still taking effect, Mr Darling said: "It is a bit early to say 'How do we get out of this?' You must have a plan that allows you to exit in a way that is consistent with allowing the economy to grow again. Don't for goodness' sake get out of them before you have completed the job."

The Chancellor is sticking to his forecast of a V-shaped recession in Britain, with a return to growth around the end of the year: "I made my forecasts. I am not changing them."

His Budget prediction in April that the British economy would grow by between 1.25 and 1.5 per cent next year, which was widely criticised as too rosy, is expected to look better next week when the International Monetary Fund publishes a new forecast.

But Mr Darling is worried that other nations, in particular France and Germany, will take their foot off the pedal too quickly, jeopardising recovery in Britain and around the world. Referring to the prospect of a global W-shaped or double-dip recession, he said the world must "deal with the risks", including rising oil prices and unemployment figures which would continue to grow next year.

"A lot of obstacles" remained to be negotiated on the path to recovery. "We are at a critical stage," he said.

There are also tensions between Britain and America on one side and France and Germany on the other over how the G20 should prevent a return to the risky behaviour undertaken by banks that was blamed for the financial crisis. Nicolas Sarkozy, the French President, and Angela Merkel, the German Chancellor, are leading the calls for a crackdown.

Mr Sarkozy's plans would affect the mainly US and UK big banks rather than the smaller continental ones. Mr Darling admitted: "The French would appear to restrict this [new] regime to a certain class of banks – large complex ones. I believe this policy should be good for all banks. What is good for one is good for the lot."

UK officials accused Mr Sarkozy of "grandstanding" after France proposed a cap or tax on bank bonuses at a meeting of EU finance ministers yesterday and portrayed Britain as the roadblock to reform. The Treasury believes that proposal would be unworkable because bankers would merely bump up their basic pay.

Mr Darling was wary of anything that amounted to a "global pay policy" but saw "no problem" with French and German plans to claw back bonuses after three or four years if they were not justified by performance.

He hopes to narrow the differences over bonuses this week so that G20 leaders can approve a detailed blueprint in Pittsburgh. Tomorrow he will propose an end to short-term rewards; with greater transparency and higher capital requirements so that banks have a cushion for bad times.

Mr Darling is determined to avoid loopholes that would let bankers get round curbs or "play off one country against another". He said: "Banks must remember they were rescued not for themselves but to get credit going. They forget that at their peril."

Mr Darling hinted that to close the deficit in public finances, his pre-Budget report this autumn would include real spending cuts on top of the £35bn in efficiency savings he has already announced, through delaying some projects rather than scrapping them. "There are some things you can do today, this year, next year and some things that may have to wait. I think people understand that," he said. "I am not going to set them out now."

Admitting the public finances would be "tight", he said Labour would decide on cuts in line with its values and he relished a fight with the Tories over that: "People do not want to see the detail down to the last drawing pin. They want to see the direction of travel." Mr Darling welcomed Mr Brown's acceptance of the need for cuts, which he had been reluctant to acknowledge before the summer break. "The Prime Minister discusses these things a lot and very regularly. We are pretty clear about what we both want to do."

Mr Darling was adamant that Labour's strategy was not to ask voters to say "thank you" for limiting the recession's impact.

Recalling that Winston Churchill won the Second World War but lost the 1945 election, he said: "You win elections by looking ahead, not by looking backwards."