The chancellor has announced plans to create around 500,000 jobs by bringing forward projects such as the Trident nuclear missile replacement, the £16 billion Crossrail project and a £45 billion upgrade of all secondary schools.
Citing economist John Maynard Keynes, Mr Darling said: "You will see us switching priorities to areas which make a difference – housing and energy are classic examples where people are feeling squeezed."
A Treasury spokesman said that imagination would be the key to targeting the slump without new money.
The Ernst & Young ITEM club has forecast that the economy is already in recession and will shrink by one per cent next year, adding that house prices will fall 14 per cent by December compared with 2007 and further falls of ten per cent can be expected in 2009, before stabilisation in 2010.
Meanwhile, business secretary Lord Mandelson has refused to use the word 'recession', saying that the contraction of the economy cannot be predicted.
He added that "many" small and medium-sized companies would see financial difficulties with some likely to go bust.
