Mr Clarke, 68, said the British economy is headed for a “catastrophic crisis” that will be “far worse than anything that has occurred in my lifetime”.
“There will be a very serious recession next year,” he said in an interview with Telegraph TV. “I think the big problem in 2009 will be the catastrophic fall in consumer spending demand, spending in shops will get worse.”
Mr Clarke, who as Chancellor of the Exchequer between 1993 and 1997 led Britain’s recovery from Black Wednesday, called for a temporary cut in VAT to boost spending.
Speaking as the Office of National Statistics revealed unemployment has reached an 11-year high of 1.82m, Mr Clarke said the number of jobless could soon reach three million.
“It is going to go up a long way… whether we will get back to three million again is one of those slightly morbid questions I really don’t know the answer to. But it could get pretty big,” he said. Rising unemployment will have a “devastating effect” on families and lead to more people being unable to pay their mortgages, he said.
The former Chancellor said Gordon Brown has received undue credit for his role in attempting to shore up the global economy. “The idea that Gordon has saved the world is not true,” he said. “We still have a major, major crisis in this country and… public finances are in a terrible mess”.
Mr Clarke said the larger than expected 1.5 percentage point cut in the base rate was a good move, but cautioned that it would not end the crisis. “We had a big cut in interest rates, about which there was a wholly exaggerated expectation, in the short term it will have modest effects, if any. Long-term it will begin to have effects.
“We are not yet in a state where we can be absolutely certain we are not going to have something close to meltdown next year”, he said. “You do have to see what can be done with taxes.”
He cautioned that Britain has “mounting debt, which is unsustainable” but said policymakers should bear in mind the effect a “full-blown depression will have on public finances”. Looking forward to the Pre-Budget Report he said any fiscal stimulus package would have to work in both the national interest and contribute to worldwide efforts to stabilise the global economy.
Mr Clarke said the public can see the Prime Minister has got more “confident” in his economic judgement, but said he imagines the Treasury is being “driven crazy by the wild way” in which he and his advisers spark speculation about the way the Government intends to combat the financial crisis.
According to Mr Clarke, public respect for banks, which are “hated institutions” at the best of times, has collapsed. He was also “very concerned” that the Government could make the crisis worse by forcing banks into “lending that they cannot afford”.
“When I hear these stories of the Chancellor being presumably ordered by the Prime Minister to get the banks in and waving newspaper headlines at them I think that is no way of making policy,” he said.