The chancellor Alistair Darling has pledged to clean up the banking sector in order to bring greater stability to the economy.
Speaking at Labour’s Party Conference in Manchester, Darling admitted that the “unprecedented” economic challenges of recent months, plus the twin shock to the global economy of the credit crunch and oil crisis, mean the financial system will “never be the same”.
However, he expressed confidence that Gordon Brown and the Labour party would be successful in helping “guide the global economy into calmer waters”.
Darling said: “Our economy is strong. We have historically low levels of inflation and high levels of employment.”
The government’s first priority is to stabilise the banking system, Darling said, by beefing up the way financial firms are regulated and letting the Bank of England provide £100 billion of funding to banks.
Despite predicting a bumpy road ahead, Darling pledged to “do whatever it takes” to bring back and maintain financial stability.
In two weeks' time a banking reform bill will be introduced in the House of Commons, that will give the Financial Services Authority more powers to supervise banks and intervene if a bank gets into trouble.
Better protection for savers will also be put in place.
Darling said: “It's not a question of light-touch regulation against heavy-handed regulation. It's about effective regulation. I can promise that wherever weaknesses are found in the financial system - whether in the powers of government, the Bank of England or the FSA, I will take steps to deal with it.”
During his speech, the chancellor also attacked the “bonus culture” at banks and other large financial firms for encouraging reckless decisions and costing consumers and smaller businesses.
It seems likely that the government will be forced to work closely with other countries in its bid to restore health to the economy.
Darling said: “Just as no government on its own can combat global terrorism or tackle climate change, so no government alone can put in place the right supervisory safeguards in this global economy.
“In the next few weeks Gordon and I will be in the US and Europe working with our counterparts to put in place the measures internationally needed to prevent the mistakes and misjudgements which caused this crisis.”
Prior to his speech today, Darling was pressed by broadcast journalists over whether taxes would have to rise in order to increase spending. Although the chancellor didn’t rule out tax rises in this year’s pre-Budget report, he did say that reducing people’s take home pay would not benefit the economy.
Instead, the government is likely to keep on borrowing in order to fund public spending.
The Centre for Economic Business Research calculates that public sector borrowing is likely to hit £90 billion in the next tax year.