Nov. 12 (Bloomberg) -- Bank of England Governor Mervyn King said the government's plan to stimulate the U.K. economy should be temporary, suggesting Prime Minister Gordon Brown will have to claw back cash in future years to keep borrowing in check.

``In these extraordinary circumstances, it would be perfectly reasonable to see some use of fiscal stimulus, provided two conditions are met,'' King said at a press conference in London today. ``One, that it's temporary. Secondly, that it would be clear there was a medium-term plan to bring tax and spending into balance.''

The remark is a warning to the Labour government as it puts together a package of measures aimed at cushioning consumers and businesses from the impact of the first recession in 17 years. King is attempting to keep a decline in the value of the pound from going too far as the Treasury opens its widest budget gap since World War II.

``It is a clever way of trying to constrain the scale of fiscal easing,'' said Michael Saunders, an economist at Citigroup Inc. ``Such constraints are important now that the government seems to be returning to a 1970s stance of favoring high budget deficits.''

The pound fell to a record against the euro and also against the dollar after King signaled the central bank would cut interest rates again.

Pound's Decline

The currency has declined 28 percent to $1.52 in the past year Britain's trade deficit reached record levels and government borrowing surged. King said it would be a problem if the pound dropped too sharply.

``If sterling falls far enough this will be a concern and it will have an impact on inflation,'' King said. ``It's something we keep a very careful eye on. We have no wish to see it fall very sharply.''

Brown today reiterated his pledge to bolster growth, indicating that the government is working on tax cuts and spending increases along with other nations in the Group of Seven countries. Chancellor of the Exchequer Alistair Darling will deliver his pre-budget statement on Nov. 24.

``People are beginning to understand around the world that we are dealing with a new set of circumstances, of low inflation next year, a downturn and the credit crunch and that requires very special measures indeed to deal with unprecedented circumstances,'' Brown said in Parliament. ``I believe that round the world there is now increasing support for the policy we have put forward.''

Global Stimulus

Later this week, Brown meets with other leaders from the G- 20 group of nations in Washington. Britain along with the U.S., China, Germany, Spain and Italy is working on easing fiscal constraints to pump up the economy.

The U.K. Treasury had a budget gap of 37.6 billion pounds ($57 billion) in the first half of its fiscal year, the most since World War II.

Spending is already increasing even though the inflow of tax receipts slows. Since March, Brown's government delivered tax cuts and spending increases worth 4.8 billion pounds to give relief to low-income earners, delay an increase in fuel duties and to help homeowners with mortgages and stamp-duty taxes.

Impact on the Pound

If ``it's not clear how fiscal plans are going to be brought into a stainable pattern further down the road, that's likely to lead to concerns,'' Charles Bean, the central bank's deputy governor, said at the briefing led by King. Provided stimulus is ``understood to be strictly temporary,'' the ``impact on the exchange rate would be far more muted.''

There are signs that the extent of U.K. government borrowing may be starting to unnerve investors in sterling- denominated assets.

Net outflows of foreign investment from U.K. bonds in the past two months are equivalent to about 75 percent of the inflows in the previous four years, The Financial Times reported today, citing a report by New York Mellon bank.

``The crucial thing is how the fiscal policy action affects investors perceptions of the medium term,'' Bean said.

King declined to respond to a question asking whether he was concerned about the government's ability to meet its growing need for financing.

To contact the reporters on this story: Mark Deen in London at markdeen@bloomberg.net

Last Updated: November 12, 2008 10:43 EST