Oct. 27 (Bloomberg) -- Prime Minister Gordon Brown is set to increase spending to cushion the U.K.'s first recession since 1992, saying a 50 billion-pound ($79 billion) bank-rescue plan and interest-rate cuts aren't enough to stem the economic slump.

``We will and can allow borrowing to rise to help restore demand and to come to the aid of workers, businesses and homeowners,'' Brown will say in a speech in London today, according to extracts released by his office. ``That is why the responsible course is to borrow now to maintain growth and output.''

The U.K. economy shrank in the second quarter, its first contraction in 16 years. Brown and Bank of England Governor Mervyn King said for the first time last week that Britain is heading for a recession, while Charlie Bean, the central bank's governor for financial stability, said in an Oct. 24 interview with the Scarborough Evening News that the turmoil in the banking industry is the worst ever.

The Conservative opposition has criticized Brown for failing to contain spending when the economy was growing.

Debt is already above the ceiling of 40 percent of gross domestic product set by Brown when his Labour Party came to power in 1997. Including the liabilities of Northern Rock Plc, the mortgage lender that was nationalized in February, net debt stood at 43.3 percent, or 633 billion pounds, in August. Six years ago, it was 30 percent.

This month the U.K. government announced plans to buy stakes in Royal Bank of Scotland Group Plc, HBOS Plc, and Lloyds TSB Group Plc in a rescue after money-market tensions undermined investor confidence in banks around the world. The economy shrank 0.5 percent in the third quarter, the Office for National Statistics in London said Oct. 24.

`Taking Action'

``This government is taking action through the tax system to support hard-pressed families and businesses through the downturn, building new international partnerships to shape a global response to a global crisis and making the long-term investments now that will secure the future success of our economy -- our people and our businesses -- in this new economic age,'' Brown will say.

Brown will use today's speech to say that further reform of the financial system will be necessary and raise the prospect of regulation of the Credit Default Swaps market, recently estimated worth around $60 trillion, according to his office. For Related News:

To contact the reporters on this story: Kitty Donaldson in London at kdonaldson1@bloomberg.net

Last Updated: October 26, 2008 20:01 EDT