Plans by Gordon Brown and Alistair Darling to jump-start the stalled economy with a “fiscal stimulus” of tax cuts and higher public spending are given crucial support today from business leaders. In a stark warning, the British Chambers of Commerce says that “a significant fiscal stimulus package” worth between £12 billion and £18 billion in this month’s PreBudget Report is now vital if a protracted and deep recession is to be avoided.

In its latest quarterly forecasts, the BCC says that, even with a large package of tax and spending measures, the recession is likely to be as bad as the early 1990s downturn, lasting five quarters, leading to a 2.25 per cent contraction in the economy, while driving unemployment up to three million.

Even steep interest rate cuts will be of only “limited help”, the employers’ organisation cautions. It says that businesses are experiencing “exceptionally severe pressures” from the credit crunch as banks impose a more stringent regime on companies.

“Without major fiscal stimulus, and a more accommodating stance on the part of the banks, the pressures facing business will worsen,” the BCC argues. “There is a distinct risk that the recession would be even sharper if the measures taken to rebuild the capital position of the major banks fail to unfreeze the paralysis in the credit markets, if the domestic policy response is inadequate, or if the global downturn proves to be even more severe than currently envisaged.”

However, the BCC also backs recent warnings that an expected surge in government borrowing to pay for the planned stimulus could risk triggering a collapse in the pound unless it is coupled with a credible Treasury plan to put the public finances on a more secure footing in the medium term.

“If the markets interpret the measures as being reckless, the pound may plummet to dangerous lows, and yields on gilts could rise sharply, thus forcing the Government to change course and frustrating its policy aims,” today’s report says.

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