Darling in Washington talks on global action plan

News that the chancellor is to meet international finance ministers in a bid to launch a global action plan to help the credit markets, coincided with a Treasury Committee warning that the Treasury may be underestimating risks that the liquidity crisis poses to the UK economy.

So as Alistair Darling prepares to hold talks in Washington with finance ministers from the G7 countries to thrash out a concrete international plan, he has been told by the Treasury Committee that in the Budget he may have given insufficient weight to the risks of continued financial market turbulence in making its forecasts for economic growth.

John McFall, chairman of the committee, said: “The Treasurys forecast of economic growth in the next two years is more optimistic than the consensus view.

Critical to this forecast is the resilience of the UK economy to shocks. Some of the very things that have kept our economy growing over the last decade may start to cause us problems and the 2008 Budget may not have recognised this fully.

McFall added: There are significant downside risks to the economy and therefore potentially to tax receipts. As such, the government is going to have to be extremely vigilant in how it manages the public finances, if it wishes to maintain its so far clean record in meeting its own fiscal rules.

At the meeting in Washington next weekend finance ministers from the G7 countries will examine a report on the financial markets by the Financial Stability Forum.

Options up for discussion will also include forcing banks to reveal the full scale of sub-prime loan exposure and the Treasury buying up mortgage-backed assets.

It is understood that the mortage-backed asset plan, which would involve co-ordinated action with the US authorities, would be kick-started if credit conditions continue to worsen at a more rapid rate.

Treasury officials are considering the practicalities of taking large tranches of mortgage-backed assets onto the Bank of Englands balance sheet, until the market for them returns.

A Treasury spokesman said: “The G7 discussions in Washington will discuss a range of measures to improve the regulation and transparency of financial markets, building on the work of the FSF, and we are keen to see that work taken forward into concrete action.