Gordon Brown today defended an expected surge in government borrowing to fuel a massive rise in pubic spending as "the responsible course" to maintain growth in the UK.

Mr Brown yesterday indicated that a further round of co-ordinated central bank interest rate cuts may be necessary. But today he gave warning that rate cuts and the billions of pounds pumped into Britain's banks may not be enough to end the financial crisis and will call for banks to start lending to businesses and households again.

In a speech to academics and business leaders at Imperial College, London, this morning, the Prime Minister argued: "The responsible course is to borrow now to maintain growth and output, and to reduce borrowing as a proportion of GDP as the economy recovers and tax receipts rise again."

Mr Brown has pledged to support those facing economic difficulties through the current downturn and said that the current slowdown makes the need for welfare reform more pressing.

The Government today launched the Employment and Support Allowance to replace Incapacity Benefit and Income Support, currently paid to those who qualify for assistance on incapacity grounds.

Mr Brown said: "The very moment in an economic downturn when we need to invest in human capital is no time to slow down welfare reform. Welfare reform will be intensified and, as we do, we should also match the right to additional support with the responsibility on people to do all they can to help themselves."

He also outlined the Government's position on reforms to the international financial system, a subject he is due to discuss with Angela Merkel, the German Chancellor, when she visits London on Thursday.

In particular, he will call for tighter regulation on credit default swaps, a type of insurance against companies that fail to repay loans. The Financial Services Authority, the industry watchdog, is currently reviewing the market.

His words are likely to add to anxieties about mounting government debt and increased government spending. Last week it emerged that government borrowing from April to September hit a record high of £37.6 billion, a 75 per cent increase on the same period last year.

Public spending has risen faster than Alistair Darling, the Chancellor, planned in the Budget earlier this year: it grew by 6.1 per cent in the first half of 2008, against Mr Darling's full-year forecast of a 5.3 per cent increase.

Figures published on Friday showed that the British economy shrank 0.5 per cent during June to September this year. It is the sharpest drop since 1990 and confirmed fears that the UK is on the brink of recession.

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