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The government cannot avoid further financial bailouts if this is the only way to ensure the survival of banks in the UK, it has been claimed.

According to Defaqto, it is likely to be a difficult task to encourage banks to lend to each other once more.

However, the firm believes this is what is needed to kick-start the economy.

If banks cannot be forced to lend then the government needs to take further action to inject money into the UK's financial system, which Defaqto suggests could be done by the Bank of England purchasing different bonds.

Michael Baxter, economist at Defaqto, said: "I am really not at all certain that the cut in VAT was a good move, I think there were better ways that the money could have been spent."

In the prime minister's New Year address, Gordon Brown said that the scale and speed of the global financial crisis over the past year was "almost overwhelming".

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