No one should be in any doubt that the recession we are entering will be a profoundly painful one. The economic omens are alarming. The political reaction is to extend the overdraft. The fiscal stimulus is back in fashion, from China to the United States, because of the deep, global and credit-induced nature of this recession. But the British Government must think hard before it embarks on yet another borrowing spree. Intelligent economic management will restore confidence; imprudence will not.

Conventional economic wisdom suggests that governments should use tax and spending to achieve medium-term objectives, and use interest rates to get the country through temporary ups and downturns. This newspaper has called for deep interest-rate cuts, to boost confidence. However, there is now a concern that the weapon of monetary policy has been blunted partially, by the banks' reluctance to pass on base-rate reductions. Their own indebtedness means that it is neither wise nor feasible for banks to resume lending to businesses and homeowners at 2007 levels, despite ministerial rhetoric.

With many businesses and jobs on a knife-edge, and uncertainty about the effectiveness of monetary policy, many voices argue that there is no time to wait and see whether interest rates do, in fact, work. The Institute of Fiscal Studies and others argue that the Government can afford to borrow more to fund a fiscal stimulus, which would be repaid at a later date through tax rises or spending cuts. It is a strong argument, but is weakened by uncertainty over what kind of stimulus would actually work.

There are three broad options. The first would be to bring forward spending on key public projects - but planning law and other glitches could mean such spending comes too late. A second option would be income tax cuts. But across-the-board cuts would be likely to raise saving, not spending. Channelling money to the poorest would probably result in spending, and would help those most in need. This is particularly attractive to some Labour MPs, who sense a last opportunity to redistribute wealth. But it is also risky: co-ordinated international action would be needed to prevent the extra cash disappearing into imports.

A third and more effective option would be targeted and temporary tax cuts. VAT, for example, could be cut by up to 2.5 per cent under EU law, with a promise that it would revert to its current level in a year's time. This would have the benefit of being easy and quick to achieve, and would create an immediate incentive to spend. The Conservative Party has also proposed giving national insurance breaks to employers who take on unemployed workers in the downturn, an idea that has the merit of being funded, in principle, by welfare savings.

The new political fault line is not on tax cuts, but on borrowing. The Conservatives argue that any tax cut should be funded by savings, not borrowing. The Government has yet to find between £3 billion and £4 billion to pay for this year's stamp duty holiday, fuel duty and 10p tax cut packages. Its poor debt record means that additional borrowing risks alarming foreign investors.

There is clearly a case for targeted, temporary tax cuts, implemented now but to be funded by cutting wasteful spending programmes. Gordon Brown has made overoptimistic forecasts in the past. Now he must have a clear strategy for paying the bill that he has run up in the past five years. This should include the creation of an independent body along the lines of the office of budgetary responsibility proposed by the Opposition. Banks and consumers are having to re-embrace prudence: so must Mr Brown.