The state of the economy is worse than at the time of April's Budget, the Chancellor has admitted, as he warned that public sector pay had to reflect the squeeze in the rest of the economy.

Alistair Darling also acknowledged that government spending faces "much tighter" limits as a result of the recession, in one of the most frank interviews about the state of the public finances so far.

Last week the Office for National Statistics revealed the recession had begun three months earlier than had been thought, in April last year rather than July, and that the economy had slumped at its fasted pace for 50 years, down 2.4 per cent rather than previous forecast of 1.9 per cent.

Speaking on Sunday Live on Sky News, Mr Darling said: "At the time of the Budget I said the downturn would be very substantial". Asked if it was worse than he anticipated, he said: "It has been", but added that many commentators now agreed that Britain will come out of recession at the end of the year.

Although he confirmed that public spending was being accelerated "now" in order to help the economy, he gave one of the most explicit indications to date that it will contract significantly in the future.

The Chancellor said that "it doesn't make any sense to fix in detail [the figures]. But the overall envelope will be much tighter."

But a briefing paper released by Downing Street has suggested that public spending needs to remain high in order to ease the economy out of recession more quickly.

"While public finances need to be sustainable in the long term, now is not the time for fiscal contraction, but for ensuring that public investment can encourage private investment to grow," it says.

This week Gordon Brown will warn that the economy is on a knife-edge, and that more action needs to be taken to prevent a second downturn.

Speaking ahead of visits this week to France and Italy, he will say that rising oil prices and unemployment and falling trade levels mean that the world economy is still in a precarious position.

He will say: “If we do not take the necessary action now to strengthen the world economy and put in place the conditions for sustainable world growth we will be confronted with avoidable unemployment for years to come”.

This could revive the "fiscal stimulus" row that raged ahead of the G20 summit in April, where the world emerged divided over the need to "pump prime" economies with injections of more public money.

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