A report by the Centre for Policy Studies (CPS) to be published on Tuesday will claim the responsibility for the banking crisis lies largely with the Labour Government's decision to remove responsibility for banking oversight from the Bank of England.

Its publication comes as surveys show collapsing consumer spending and business confidence, with company bosses becoming more cautious about their trading prospects and investment plans.

The author of the CPS report, ex-Conservative MP and former shadow chief secretary to the Treasury, Howard Flight, said that although the banking sector had to take some blame, Labour policies that led to excessive money supply growth, excessive borrowing and the assumption that "boom and bust had ended" were the chief reasons for the crisis.

Mr Flight said: "The responsibility for the probability of a UK banking crisis can be laid largely at the current Government's door. The roots are in mistaken monetary and economic policies and in regulatory failure.

"The Government's instruction to the Bank of England to meet a 2.5pc retail price inflation measurement was deeply flawed. It led to an excessive increase in the money supply, as a result of which banks lent incautiously."

Looking forward, Mr Flight calls for interest rates to be cut substantially to ward off the near-term risk of deflation. He also wants infrastructure investment financed by the private sector to be brought forward to stimulate the economy.

Furthermore, said Mr Flight, if the recession turns out to be as severe as the report anticipates, personal and corporate taxes should be cut, and more banking support should be offered to small businesses.

On public borrowing, Mr Flight accuses the Government of "gross mismanagement" of public finances. He claims the Government has put the recovery of the private sector at risk by not saving during the boom years and now planning a huge public-sector spending spree.

His comments come as a poll of 500 company bosses by the Institute of Directors found that the proportion who were preparing for worsening trading conditions hit a new high in September, prompting the institute to warn that its members were now preparing to "postpone or cancel altogether" significant amounts of business investment. Graeme Leach, the institute's chief economist, said: "The falls in business confidence and investment intentions take us into completely uncharted territory."

A negative balance of 37pc of those polled were less optimistic about their company's prospects, compared with -25pc in June. The balance of those who were less optimistic about the investment outlook fell to -48pc, from -34pc previously.

The survey follows a prediction from the insolvency profession that business failures will rise by 41pc on 2007 levels by the end of next year, an increase that its trade body R3 described as "catastrophic".

Official figures from the Insolvency Service are due out this Friday and are expected to show a significant jump on the 15pc year-on-year increase in insolvency seen in the three months to June.

Last week, Experian, the credit information group, said that it had recorded a 28pc increase in business failures between July and September compared with the same period last year.

Retailers, including some major high street players, are being hit particularly hard by the downturn.

The Confederation for British Industry reported on Friday that retail sales volumes fell for the seventh month in a row during October, with a balance of 27pc more retailers reporting weaker sales than a year ago, the same as in September.

Hitwise, which tracks UK internet traffic, found that even online retailers were being affected, with total traffic falling 0.5pc in October, the first annual decline this year.


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