Gordon Brown’s economic rescue package was overshadowed by a warning yesterday that Britain is plunging into recession.

Mr Brown announced a year-long suspension of stamp duty for homes under £175,000, as he began his political fightback with a package aimed at first-time buyers and homeowners.

Questions about how the measure will be funded and a forecast that Britain will be the only leading economy in recession by the end of the year threatened to derail Mr Brown’s relaunch. Alistair Darling was unable to answer questions on how he will pay for the £600 million stamp duty holiday as he endured another awkward day of speculation over his future.

Suspicions that Mr Brown forced his Chancellor to bring forward the stamp duty measure grew, as it emerged that the final decision was only taken at the weekend.

Times Archive, 1983: Chancellor considers options for reducing burden

Stamp duty as it is now applied is unfair because it produces large jumps in taxation as the cost of a property crosses a threshold

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Treasury sources said that the Chancellor was “not persuaded” by the need for a suspension late last week. Caroline Flint, the Housing Minister, said last month that the Government would not be “bumped into” announcing any measures on stamp duty before the PreBudget Report in the autumn.

Mr Brown got his way after the fall-out from Mr Darling’s claim at the weekend that Britain was facing the worst economic conditions in 60 years. The Chancellor sought to repair the damage yesterday and said that he was optimistic that Britain could weather the storm owing to its high employment levels and low interest rates.

His efforts to restore confidence were badly undermined by a forecast from the Organisation for Economic Cooperation and Development (OECD) that Britain’s economy will shrink in the final two quarters of the year. In its latest outlook for the G7 group of leading industrialised nations, the OECD said that Japan, Italy, France and Germany, which recorded shrinking output in the second quarter of the year, would recover sufficiently to record some growth this year. It also revised its forecast for US growth this year from 1.2 per cent to 1.8 per cent.

In contrast, the British economy is set to slump further after nearly 16 years of consecutive growth was broken in the second quarter of this year. It is expected to shrink by 0.3 per cent between July and the end of September and by 0.4 per cent in the final three months of the year. The OECD has also cut its its annual growth forecast from 1.8 per cent to 1.2 per cent.

Jorgen Elmeskov, the OECD’s acting head of economics, said that the extent of the disruption to the leading economies from the the US sub-prime crisis was still uncertain. “Potential further losses on housing and construction finance are one source of concern,” he said.

The Treasury is expected during the Pre-Budget Report to reduce its forecasts for growth of between 1.75 per cent and 2.25 per cent in 2008 and 2.25 per cent and 2.75 per cent in 2009.

George Osborne, the Shadow Chancellor, said that the forecasts highlighted Mr Brown’s “weak and dysfunctional” leadership. “Gordon Brown is more focused on his own short-term survival than on the long-term recovery of the economy that he has led to the brink of recession,” he said.

The unions stepped up the pressure on the Prime Minister, with Derek Simpson, the joint general secretary of the union Unite, saying that support for Labour among its members had “probably halved”. In an interview with Channel 4 News, Mr Simpson added: “I think, however, that the half is in the undecided camp.”

He said he believed that Labour was still capable of winning the next election. “The key is, will Gordon have the nous to deliver the kind of message that would reconnect with those disillusioned Labour supporters?”

Asked if Mr Brown was a help or hindrance, he replied: “He is capable of being both.”

The second stage of the economic rescue package is expected to be announced on Monday and to include measures to help poorer families with fuel bills. An aide to John Hutton, the Business Secretary, played down speculation that a number of the energy companies, including npower, EDF and E.ON, were refusing to sign up to Mr Brown’s main revenue-raising measure, in which the Government hopes to raise £160 million by selling permits under the EU carbon-trading scheme.

Not a makeover – just downsizing

When Gordon Brown appeared at an emergency EU summit on Monday, the Prime Minister’s weight loss was seized on by Nicolas Sarkozy, who took pleasure in drawing it to the attention of fellow European leaders. A summer of jogging and long walks in Suffolk had clearly done the Prime Minister good, allowing Sarah Brown to boast on the trip to China about her husband’s weight loss. While he was on holiday in Southwold, he hired a personal trainer, Millie Dobie, for £50 an hour. She would arrive before breakfast and take him on a brisk run through woods and fields, while police bodyguards jogged along behind. He was clearly a more rounded politician, right , before this regime . Back at No 10 he “regularly” uses a running machine, according to his spokesman. But Downing Street denies he has had any makeover. They empasise, for instance, that he does not have a new tailor – he still mainly wears suits from Gieves & Hawkes.

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