Chancellor George Osborne addresses The Times CEO Summit in London. The Chancellor has warned of a fresh assault on welfare payouts over the summer as the Government looks for savings to reduce Britain's massive state deficit. PRESS ASSOCIATION Photo. Picture date: Monday June 28, 2010. See PA story POLITICS Benefits. Photo credit should read: Fiona Hanson/PA Wire

The Government stands ready to underwrite up to £40bn in loans to cash-strapped businesses in a bid to kick-start Britain’s struggling economy, Chancellor George Osborne said today.

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As he prepared to deliver his crucial autumn statement on Tuesday, Mr Osborne acknowledged the country was facing an “exceptionally difficult time” and pledged to use “every tool in the box” to get growth going again.

Earlier this year small businesses leaders in Norfolk held crunch talks with the banks where they told banking leaders that they were struggling to get the credit needed to help their businesses grow or even survive.

The new National Loan Guarantee Scheme - which is intended to cut the cost of borrowing for small and medium-sized firms - was welcomed by business leaders as an important “first step”.

But with the the Office for Budget Responsibility widely expected to downgrade its growth forecast for this year for a second time to around just 1%, Labour said it would not be enough to revive the stagnant economy.

Mr Osborne insisted he was sticking to his so-called “plan A” strategy to tackle the UK’s record debt and said he remained “confident” he could meet his target to eliminate the structural deficit by the time of the next election in 2015.

However, he acknowledged the problems besetting the world economy represented a “challenge” for the public finances and that further action was needed to to boost growth.

“Alongside that we have to lay the foundations of economic success in the future,” he told BBC1’s The Andrew Marr Show.

“This is an exceptionally difficult time. We have a slowing economy, a slowing world economy, we have this financial crisis brewing in Europe.

“It is a very, very difficult and dangerous situation. A disorderly collapse of the eurozone would have a massive impact on the UK.”

He said he was only able to launch the National Loan Guarantee Scheme because “difficult decisions” taken last year to cut spending meant that overseas investors were still willing to lend to the UK.

Under the plan, the Government will underwrite the banks’ borrowing on the commercial money markets, enabling them to borrow more cheaply. The banks will then pass on the savings to the firms they lend to in the form of lower interest rates.

For a firm currently taking out a £5 million loan at a typical interest rate of 5%, it would mean they would instead be able to borrow at 4%, saving £50,000 a year in interest payments.

“We’re using the fact we’ve earned those low interest rates as a Government with the very difficult decisions on spending we’ve taking in order to get lower interest rates for businesses up and down the country,” he said.

Mr Osborne said that initially up to £20 billion would be made available through the scheme to businesses with an annual turnover of £50 million, although that could increase to £40 billion.

A second, smaller scheme is expected to see the Government establish an investment fund with private-sector investors, such as pensions funds, aimed at providing a source of non-bank lending to larger firms.

British Chambers of Commerce director general John Longworth said that while it would be a “big shot in the arm” for the economy, it was only a “first step” in ensuring that firms had access to the credit they needed.

“In the coming months, the Treasury must act forcefully to create a framework that allows business loans to be packaged up as tradeable securities,” he said.

“This bold move would transform the business finance environment in the UK and give more small and mid-sized companies the chance to secure the financing they need to grow.”

However, shadow chancellor Ed Balls said it was now clear that Mr Osborne’s deficit reduction plan had been “a catastrophically wrong decision” that had left people “fearful and angry”.

“It was his decisions that choked off the recovery. If he moves us to a more balanced plan we will support it. If he doesn’t, I am deeply fearful about what this will mean for growth, for jobs and for deficit reduction,” he said.

In further moves, it is expected the Chancellor will use the autumn statement to announce help for hard-pressed commuters with a cap on the increase in regulated rail fares at a cost of £300 million of the next three years.

Fares - such as peak fares, season tickets and Transport for London - will rise by 6.2% next year (RPI inflation of 5.2% +1%) rather than the planned 8.2% (RPI +3%) increase.

There is also strong speculation that he will bow to intense pressure to help motorists by freezing or delaying the planned 3p increase in fuel duty due in January.

There were signs that the bank levy charged on bank balance sheets is set to rise as the current rate has failed to bring in the forecast £2.5 billion.