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Reports in The Sunday Times suggest that mandarins in some departments are expecting to have to slash budgets by up to 20 per cent. Mr Darling did not deny the claim, saying: "It's not attributed to the Treasury."

He also admitted he would be likely to revise down government forecasts at the pre-Budget report in the Autumn.

"We will come back at the Pre Budget Report and ... we will have to make further judgments," he said.

Public sector pay could be one of the first areas to be squeezed, with announcements coming in the next "few weeks".

"Public sector pay has got to reflect prevailing conditions. We have to be fair to people in private companies. We will decide on pay policy over the next few weeks."

Mr Darling was challenged why there were no plans for a Comprehensive Spending Review, setting out departmental budgets between 2011 and 2014.

Mr Darling also acknowledged he came within a short distance of being sacked as Chancellor. Asked if Mr Brown wanted to replace him with Ed Balls, who remained Schools Secretary at the last reshuffle, he said: "Some conversations I never ever repeat. In politics you have to be grown up about it. I'm here now and I have a job of work to do."

The Chancellor was appearing ahead of a new drive to tell bankers that they must behave responsibly.

He admitted he is asking the banks to do two sometimes contradictory things: strengthening their own balance sheet positions while also asking them to lend more to businesses. But he said that the government had been instrumental in stabilising their position to help them do this.

"That's why [we looked at] the behaviour of the bankers themselves, and why the regulators need to learn the lessons of what went wrong," he said.

Meanwhile Sir John Major, the former Tory Prime Minister, said that government must "downsize", suggesting that growing the state further "is a route that ends in national bankruptcy."

He said the government should reduce its size by a third, including cutting the numbers of ministers and civil servants.

He said the recession presented Britain with a "philosophical opportunity" to reassess the role of the state.

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