Adapting fiscal policy to the realities of the global financial crisis is essential to combat the UK's economic downturn, Chancellor Alistair Darling is due to say.

"Just as markets change, so should policy," he is expected to tell the Cass Business School in his annual Mais Lecture.

He will argue that policy on taxation and expenditure should reflect the "exceptional" circumstances and that such shifts in thinking are necessary across the world.

"Today, governments all over the world are using approaches that had until recently been consigned to policymaking history, but it is natural that the conduct of policy should evolve.

"Three weeks ago, we worked with other countries to put in place a plan to stabilise the banking system. These countries are committed to working together to strengthen supervision in the global financial system.

"And today we need the same determination to support the wider economy. To ensure that fiscal policy supports monetary policy, here and across the world."

But shadow chancellor George Osborne has warned that a "spending splurge" will damage Britain's economic outlook still further and reduce the scope for interest rate cuts.

Writing in The Daily Telegraph, he said the scrapping of Gordon Brown's fiscal rules would destroy "the final remaining pillar" of his economic legacy.

The director of the independent Institute for Fiscal Studies, Robert Chote, told BBC Radio 4's Today programme: "Debt, even in the event of a mild economic slowdown, is probably heading over 40% over the next couple of years or so. It is going to head considerably higher than that as a result of the depth of the recession we are going to be confronting - that's leaving aside the effect of nationalising Northern Rock etcetera.

"On the golden rule, it is hard to imagine a set of dates for the economic cycle looking ahead where the Government will be able to keep to that."

Mr Chote added: "If you go back to 2001 or 2002, it looked as though these rules were going to be kept to very easily. The problem is that the Treasury was then too optimistic about the outlook for public finances seven budgets running and that effectively had exhausted the room for manoeuvre by the time we reached this unexpected crisis.

"The challenge is to improve people's confidence that the rules will be a meaningful constraint on tax and spending decisions in the future.

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