Britain 'in recession by end of the year'

Dire economic warning casts pall over Gordon Brown's housing rescue deal

The first official warning that Britain is about to slide into recession has overshadowed Gordon Brown's attempts to revive his political fortunes with a £1bn plan to kick-start the housing market.

Yesterday's gloomy forecast by the Organisation for Economic Co-operation and Development (OECD) contradicted declarations yesterday by the Chancellor, Alistair Darling, that he is "optimistic" about the British economy.

The OECD said that Britain would be the only one of the G7 group of leading industrialised nations to fall into recession during the rest of the year.

Under Gordon Brown's plans that were announced yesterday:

* About 10,000 first-time buyers in England will get free loans for up to five years, worth up to a third of the value of new properties, if their family income is below £60,000;

* Homes worth between £125,000 and £175,000 will be exempt from stamp duty for a year, saving buyers up to £1,750;

* Householders who run into trouble with their mortgage payments will be able to convert all or part of their mortgage into rent so they pay less, with councils, associations or developers taking a stake in the property;

* A total of 5,500 affordable homes will be built by councils and housing associations at a cost of £400m.

Mr Darling immediately faced criticism for being unable to say how he would fund the stamp duty cut that will cost the Treasury £600m. He is likely to have to cut other programmes to pay for the measure, which will be announced in his pre-Budget report (PBR) next month. In an attempt to stem the rising tide of repossessions, homeowners who lose their jobs will receive income support after 13 weeks from next April, instead of 39 weeks as at present.

Downing Street dismissed speculation among Labour MPs that Mr Darling was "bounced" into announcing the stamp duty suspension by Mr Brown. The Chancellor has been cautious about acting on stamp duty, and some officials advised him it would not be the best use of scarce Treasury resources.

But he agreed at the last minute to include the cut in yesterday's package, after estate agents and surveyors claimed that media speculation that the Government would act had virtually frozen the housing market. One Labour MP said: "Darling was reluctant to move on stamp duty. We had to go higher up the food chain to stop the market collapsing completely."

Ministers stopped short of claiming that yesterday's measures would transform the housing market. They admit the key unresolved issue is the shortage of credit but there are signs of tension between Mr Brown and Mr Darling over whether the Bank of England should adopt a £40bn scheme to guarantee mortgages. The Bank strongly opposes the idea and the Treasury shares its doubts. But Downing Street is pushing for action to expand the mortgage market.

Mr Brown's allies are dismayed that the Chancellor's weekend interview put a cloud over the Prime Minister's attempt to head off Labour moves to oust him. In interviews yesterday, Mr Darling refused to express regret over his words, insisting that he and Mr Brown were "totally at one" and saying: "I am optimistic that we will get through this."

Mr Darling's optimism on the economy was not shared by the OECD, which believes it will shrink in the third and fourth quarters of this year, entering the first recession since 1991-92. It revised its forecast that Britain will grow by 1.8 per cent this year down to just 1.2 per cent, less than the 1.4 per cent predicted by the International Monetary Fund.

George Osborne, the shadow Chancellor, said of the package: "This is a short-term survival plan for the Prime Minister, not a long-term recovery plan for the economy. They've had months to prepare and they can't even tell us how much it costs, or where the money's coming from."