Anticipating this weekend’s G20 summit in Washington, Gordon Brown urges the world’s leading economies to coordinate plans for fiscal expansion. He has particular reason to want other countries to act. The global economy and financial system are in crisis, but the prospects for Britain are distinctively grim. And international investors are passing judgment. Yesterday the pound fell to a record low against the euro. It also reached its lowest level against the dollar for six years, at $1.52. If the Government borrows to finance tax cuts and additional public expenditure, then the pressure on sterling will only increase – especially if this fiscal expansion is not replicated in other countries.

For the parlous state of the UK economy, there is plenty of blame to go round. The collapse of the US housing market has inflicted immense damage on the global banking system and – by depressing US consumption – on economic growth. But the weakness of sterling reflects specific British failings. The economy relies excessively on the financial services sector; and household wealth is dominated by property investment. The economy has thus proved vulnerable to bad practice in the City, and to bad policy that failed to constrain an unsustainable bubble in house prices. This need not have happened.

The principal failure has been the Government’s mismanagement of public finances. In a downturn, there are good reasons to try to stimulate demand through tax cuts and public spending. The Government’s own fiscal rules are not sacrosanct. But if there is to be debt-financed fiscal expansion, then investors will need to believe that public spending will be restrained (or taxes increased) in an eventual recovery. If that confidence is lacking, then the weakness of sterling might accelerate uncontrollably. And there is no reason that the Government’s record should generate such confidence.

Regulation by the Financial Services Authority failed to prevent imprudent lending practices by the banks. And monetary policy has been dangerously reactive. Interest rates were kept too low initially to keep consumer price inflation within the Government’s target. And now, quite suddenly, the Bank of England forecasts that inflation will undershoot the target, owing to the depth of recession. The economy is sharply contracting, unemployment is at its highest level for 11 years, and the Bank expects the downturn to persist till well into 2009.

In these circumstances, further interest-rate cuts have been rapidly built into market expectations. That is another reason for the weakness of sterling. Had the Bank foreseen the imported inflationary pressures in food and commodity prices, the economy might have been better insulated from the shock of the credit crunch.

Government actions have made recovery more difficult. After the last UK recession in the early 1990s, successive chancellors aimed to reduce public debt in order to prevent a build-up of future debt servicing costs. Gordon Brown’s abandonment of that approach since 2002 has curtailed the Government’s room for manoeuvre sharply. And now that the global economy is subject to its greatest shock since the 1930s, the crisis is particularly intense in the UK. This is not just a reflection of external economic turmoil. It is a home-grown recession.