Britain's economy is at risk of a "double-dip" recession and may not recover fully for another five years, Kenneth Clarke warns tomorrow.

In an exclusive interview with the Observer, the former chancellor delivers a bleak message on the eve of the Tory conference – at which David Cameron is keen to strike a more optimistic note – saying he remains distinctly downbeat about the outlook for the British and global economies: "I'm at the more pessimistic end. I'm not sunnily optimistic about where the western economy is going."

Clarke, chancellor from 1993 to 1997, believes the chance of the UK being sucked into another recession is "below 50%", but insists that the risks remain substantial. "I do not rule out the risk of a double-dip recession caused by some fresh wave of global fear and crisis," he says.

Even though he warned before the election that over-aggressive cuts could harm the recovery, Clarke insists he is fully signed up to the coalition government's programme. But he says it does not guarantee a return to sustained growth because of global forces beyond its control.

Tonight, as Cameron arrived in Birmingham for the Tories' first conference as a governing party since 1996, the prime minister was determined that his ministers would produce a "good news" theme to run alongside the austerity message. "We have to tell people there is light at the end of the tunnel," said a senior Tory source. "We need to get things back in perspective."

Vince Cable, the business secretary, and current chancellor George Osborne – aware that the coalition could become defined as a government of cuts and austerity – are looking at ways to promote economic growth and boost private sector investment. A growth white paper will be produced later in the autumn.

While supporting the need for a regional investment strategy, Clarke says there is "no point in being unrealistic" about the economic outlook. He adds that Labour's approach of cutting less severely would mean the markets losing faith in the UK economy.

"This would lump us back with the Spanish, the Portuguese and the Greeks as people possibly at risk if people thought we weren't going to deliver what George delivered."

Under the slogan "Together in the National Interest", Tory ministers will attempt to promote the benefits of their coalition with the Liberal Democrats, making the point that only by working together can tough decisions be taken. Announcements are expected on privatisation of Royal Mail and schools reform.

Work and pensions secretary Iain Duncan Smith will tomorrow unveil the biggest shake-up of the benefits system in decades, with plans to introduce a Universal Credit in place of the current multitude of benefits. The aim is to save billions in the medium term by increasing the incentive of people on benefits to take up work.

Duncan Smith, who appears to have won a major battle with Osborne, said tonight it was the "dawn of a 21st-century welfare system. To those that have been marginalised and abandoned to a life on benefits by Labour I say: we will get you back into work and in control of your life.

"For the most vulnerable I say: we will protect you. And to the taxpayer I say: here is true value for money, a system that invests in you and supports you in your time of need, but expects everyone in society to contribute and will no longer allow anyone to choose a life on benefits.

Clarke said he was "mildly" relieved that David Miliband had not won the Labour leadership election, but added. "I don't underestimate Ed."

He would favour the Tories reaching out to David Miliband in the same way they had to other Blairites: "If he should want to give me some advice, he's the sort of chap I would listen to because I have a high respect for him."

http://www.guardian.co.uk/politics/2010 ... conference

Lol, killing Ed with kindness there, and possibly inadvertently damaging David

Osborne should be making more realistic economic statements like the above though, not Clarke.

I actually think that it is a dead cert depending on the stupidity of the government. They will cut badly and the economy will go into a dip. Then the government revenues will collapse still further causing further cuts, and getting into a spiral as in Ireland. Brush up on your Chinese because the brightest will be off to the far east, which is probably the reason for the fall in unemployment in Ireland this month.

Yes, we can't make any cuts, we must spend, spend, spend even if we can't afford it.

Yes when one person does it it is fine, but when everyone does it the economy collapses. Don't forget that what you spend is the income for someone else. If everyone else is cutting back then your income will collapse as people save or pay their debts back. I am not proposing that we spend any more. We could still have some cuts to some wasteful programs, but since the government could simply print what it needs then why borrow it? QE is basically printing money but buying bank crap. If they decided to buy hospitals or pay police wages for a year wouldn't that be better?

Wouldn't give investors much confidence in our currency. Hyperinflation anyone?

Inflation is already a problem, mainly because interest rates are too low and the banks are bidding up commodities which will feed through to higher consumer prices over the next few quarters. I think inflation above 10% is possible. I think that the government will possibly allow it to remain high because it reduces the impact of debts. The real issue is what the response will be. Allow it for a while or respond with higher interest rates? Which will slow the economy a little faster.