The Government faces its worst nightmare: a deepening recession and acute financial problems spreading outside the banking sector to industry. Senior ministers have been aware for some time that the auto business would be next in line seeking state support. In America, the big three Detroit motor groups are seeking huge loans, while the subsidiaries of US-owned car makers are already doing so in Sweden and Germany.

The latest motor industry plea presents the Government with an acute dilemma. As Lord Mandelson said in a lecture two days ago, there is absolutely no desire to repeat what he called the “failed interventionism of previous Labour governments” and the very big, and invariably sharply rising, subsidies for car companies such as BL. Unconditional support is against the spirit of new Labour. Moreover, European Union rules against “state aids” severely limit what governments can do to protect vulnerable sectors.

But the Government believes it cannot stand by and let big companies collapse because of possibly short-term, cyclical problems. Lord Mandelson’s preference, set out in a paper for last week’s meeting of the National Economic Council, is to concentrate on sectors/companies with long-term growth potential and a strong research and development programme. This means better coordinated government support for new technology, skills, regulation and export promotion.

The Government wants to avoid being seen to pick winners, while the word “bailout” is banned. The key is growth potential. Hence, there will be no backing for Woolworths and retailers. In other cases, limited commercial loans and guarantees may be offered to ensure that companies can continue to trade. The recent PreBudget Report provided for an increase in export credits. But any help will be limited, short term and conditional. The last thing the Government wants is to have to take large equity stakes in troubled manufacturing sectors, as it did in the 1970s, and has now done in banking.

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