The Government is ready to underwrite up to £40 billion in lending to cash-strapped businesses in an attempt to kick-start Britain’s flagging, Chancellor George Osborne has said.

Mr Osborne, who delivers his autumn statement on the economy on Tuesday, said that it was “an exceptionally difficult time” for the country,

He said that he would use “every tool at our disposal” to get the economy going again, without jeopardising the UK’s triple A credit rating.

Mr Osborne acknowledged that the independent Office for Budget for Responsibility was set to downgrade its predictions for economic growth when it publishes its latest forecasts on Tuesday.

“This is an exceptionally difficult time. We have a slowing economy, a slowing world economy, we have this financial crisis brewing in the Europe,” he said.

While he insisted he was sticking to his “Plan A” deficit reduction programme to eliminate the structural deficit by the time of the next general election in 2015, he accepted further measures were needed to boost growth.

“Alongside that we have to lay the foundations of economic success in the future,” he said.

“We will be setting out all these sorts of measures on Tuesday to get the private sector into a more competitive place so that actually British companies can compete now, not just against their European counterparts but against companies in China and India and America as well.”

He said that initially £20 billion would be made available to business through the new National Loan Guarantee Scheme “but that sits within an envelope that could be as large as £40 billion”.

“The Government will underwrite the loans the banks make to small businesses in order to cut the interest rates that small businesses pay. That will help with their cash flow, that will help them retain their workforces, that will help them expand and invest,” he said.

While ultimately the taxpayer would stand behind the guarantees, Mr Osborne insisted that the risk to the public purse was low.

“I think this is actually relatively low risk for the Government, given the strength of our balance sheet and our low interest rates and the credibility we have got in the world,” he said.

He added: “In all sorts of ways we are trying to, not as a nation deliberately borrow more money and risk our low interest rates, risk our AAA credit rating, but use absolutely every other tool at our disposal to get the British economy moving, to pull us out of the situation that many other countries find themselves in at the moment.”

The National Loan Guarantee Scheme was welcomed by CBI director general John Cridland who said it had “the potential to make a real impact on business growth.”

“With the ability to be rolled-out immediately and offer small and medium sized firms more and cheaper loans, this scheme will be warmly welcomed by UK business,” he said.

John Longworth, the director general of the British Chambers of Commerce, said that while it would be a “big shot in the arm” for the economy it was only a “first step” in ensuring that firms had access to the credit they needed.

“In the coming months, the Treasury must act forcefully to create a framework that allows business loans to be packaged up as tradeable securities,” he said.

“This bold move would transform the business finance environment in the UK, and give more small and mid-sized companies the chance to secure the financing they need to grow.”

Under Mr Osborne’s plan, the Government will underwrite the banks’ borrowing on the commercial money markets, enabling them to borrow more cheaply.

The banks will then pass on the savings to the firms they lend to in the form of lower interest rates.

The scheme - said to be similar to the former Labour government’s credit guarantee scheme launched in the wake of the 2008 credit crunch - is aimed at helping small and medium enterprises (SMEs).

For a firm currently taking out a £5 million loan at a typical interest rate of 5 per cent, it would mean they would instead be able to borrow at 4 per cent, saving £50,000 a year in interest payments.

Ministers hope to get the scheme up and running by the beginning of next year, with the intention that it will run for the next two years.

Because the loans are not being made directly by the Government they will not appear on the national balance sheet and taxpayer will only become liable if the banks fail to pay their debts.

A second, smaller scheme will see the Government establish an investment fund with private sector investors, such as pensions funds, aimed at providing a source of non-bank lending to larger firms.

In a further move, Mr Osborne will announce help for hard pressed commuters with a cap on the increase in regulated rail fares.

Fares - such as peak fares and season tickets - will rise by 6.2 per cent next year (RPI inflation of 5.2 per cent +1 per cent) rather than the planned 8.2 per cent (RPI +3 per cent) increase.

The cap will also cover London Underground and London bus fare and will cost the Treasury £300 million over the next three years.

There is also strong speculation that he will bow to intense pressure to help motorists by freezing or delaying the planned 3p increase in fuel duty due in January.

There were signs that the bank levy charged on bank balance sheets is set to rise as the current rate has failed to bring in the forecast £2.5 billion.