£2bn 'green bank' plan to be at heart of Darling's Budget

Chancellor rules out pre-election giveaway in 'workmanlike' proposals

A £2bn "green bank" that finances environmentally friendly transport and energy projects will be at the heart of Alistair Darling's Budget.

The Chancellor said yesterday he was not preparing a pre-election "giveaway" package for Wednesday, with most of the spare cash in the Treasury's coffers being used to reduce Britain's huge deficit. But in a report today, the economic forecaster the Ernst & Young ITEM Club says the Chancellor's projections for the economy and public-sector finances are too optimistic. It calls for spending cuts of £25bn in the next five years and says Mr Darling must spell out where the axe will fall.

In the Budget, Mr Darling will focus on smaller schemes to cut dole queues, with the establishment of a Green Investment Bank the centre-piece of a package of job-creation measures. It will be set up with £1bn from the Treasury, funded by the sale of Government assets such as the Tote and the Dartford River Crossing. Private industry would contribute £1bn to the bank.

The money would go towards new nuclear power stations, renewable energy schemes – such as wind farms and solar power – and developing new rail routes. The Government believes an extra 400,000 "green jobs" can be created over the next five years in the drive to cut Britain's CO2 emissions.

Mr Darling is expected to use higher-than-expected tax receipts in recent months of £5bn to £10bn to reduce borrowing. The Chancellor told BBC One's The Andrew Marr Show yesterday he would produce a "sensible, workmanlike" Budget. He added: "I don't think the mood of the times is for giveaways."

He has been under pressure from some Cabinet colleagues to use some of the cash for a boost to public spending, creating clearer economic dividing lines with the Conservatives. But he has concluded that the public is aware of the need for urgent action to tackle the national deficit and would be sceptical about the motive for "sweeteners" announced before the election.

There is no prospect of previously announced tax increases being cancelled on Wednesday and Mr Darling will confirm rises in duty on alcohol and tobacco. He is, however, considering delaying a planned 3p a litre rise in fuel duty following steady increases in recent months in the cost of petrol. Companies have told the Treasury that soaring prices at the pumps are hampering their recovery from recession.

Mr Darling insisted that Labour would not hold a second Budget if it won the election expected on 6 May, dismissing Conservative accusations that this week's statement would be "window dressing". He also side-stepped the question whether he expected to continue as Chancellor if Labour wins the election.

The Chancellor is planning to approve a tax on banks' profits as long as it is part of an international agreement among other major economies. The Government's stance puts it at odds with the Conservatives, who this weekend announced they favoured unilateral action if necessary. Mr Darling said the Tory plans would pose "a hell of a risk" to jobs in the City and the banking sector.

The "green bank" initiative comes amid doubts whether Britain can achieve its targets of a 34 per cent reduction in 1990's CO2 emissions by the year 2020 and of a vast increase in the use of renewable energy. It has also been estimated that Britain faces a £165bn bill to replace and expand Britain's ageing energy infrastructure.

Mr Darling will argue that some Government investment is essential to encourage private-sector investment. Ministers point to the success of the car-scrappage scheme, under which motorists were given £2,000 off the price of a new model, of which £1,000 came from the Government and £1,000 from motor manufacturers.

The Chancellor said yesterday: "Our challenge is to make sure that Government is prepared to do what is necessary to get growth. A little bit of Government help can unlock a lot of private-sector investment, and that is going to be the focus this week."