Bank of England Governor Mervyn King warned the UK government today not to allow its spending to get out of control or start underwriting new mortgage lending as Britain nears its first recession since the early 1990s.
The Labour government is under growing pressure to ramp up spending to help households cope with the economic downturn.
Finance minister Alistair Darling has said the government can allow borrowing to rise, but King said that failing to keep fiscal policy credible could make the central bank's job harder.
'The long-term risk is a fiscal framework that is not perceived by financial markets to be credible does put up pressure on inflation expectations because it undermines the market's belief in the credibility of both the monetary and the fiscal framework,' King told parliament's Treasury Select Committee.
'And that will make our life more difficult if inflation expectations were to remain higher than we would wish,' he added.
Many analysts expect government borrowing for this financial year to overshoot Darling's £43 billion forecast and the Institute for Fiscal Studies has criticised the government for leaving little room to manoeuvre if the downturn worsens.
