Darling under debut Budget pressure

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Chancellor Alistair Darling must use the Budget to prepare for what could be a "perfect economic storm" hitting the UK over the next few years, Liberal Democrat Treasury spokesman Vince Cable has warned.

While stopping short of predicting a slowdown, Mr Cable said there was good reason to believe the UK faced a "high risk" of recession.

His warning came a day ahead of Mr Darling's first Budget, which is widely expected to be the toughest since Labour came to power more than a decade ago.

With the Chancellor constrained by an escalating national deficit from offering tax cuts or boosting spending, forecasts are for a round of increases in "green" taxes on motoring and flying, as well as rises in alcohol levies designed to tackle binge-drinking as well as raising revenue.

The fiscal conditions, coupled with rising commodity prices which restrict the Bank of England from sharp cuts in interest rates, risk fuelling the slowdown in consumer and business spending which has resulted from the credit crunch, falling house prices and fears over debt, Mr Cable warned.

Some "serious people", including bankers Morgan Stanley, are saying that there is a one-in-three chance of a technical recession in the UK in 2008 or 2009, he pointed out.

"That has to be addressed honestly, not as a prediction but a risk," said Mr Cable.

"There are very good reasons for believing that there is a high risk of a recession. It is not probable but it is certainly very possible."

"We therefore need to think about how the British economy would cope with it."

Mr Cable urged the Chancellor to use the Budget to bring house prices within the Bank of England's inflation target, in order to give the Monetary Policy Committee more leeway to reduce interest rates at a time of tumbling property values.