George Osborne is to detail a new government scheme to underwrite billions of pounds of bank lending to businesses in his autumn statement on Tuesday.

The plan is an attempt to get credit flowing to Britain's struggling small firms.

The "credit easing" scheme, which is hoped to be a “game changer” by the Treasury, is intended to stop the UK from falling back into recession by underwriting banks’ borrowing.

The institution will then be obliged to pass on the cheap lending rates to small businesses via lower interest rates.

Speaking on the Andrew Marr Show, Osborne said: "The basic idea of this national loan guarantee scheme is to use the fact that the government can borrow money very cheaply to help small businesses to borrow money more cheaply than they do at the moment."

"So the government will underwrite the loans the banks make to small businesses in order to cut the interest rates small businesses have to pay," he said.

"This will help them with their cash flow, to retain their workforces and expand and invest."

The chancellor said the treasury had set aside £20 billion for the scheme, however that “sits within an envelope that could be as big as £40 billion”.

"These are guarantees,” he said. “We [the government] are not lending the money ourselves.”

"There are lots of governments who couldn’t do this as they aren’t credit worthy,” he added.

Osborne admitted it wasn’t a decision without risk, as should a bank fail the taxpayer would be standing behind it to bail it out.

However, he insisted that it was relatively low risk given the strength of the government’s balance sheet.

The Chancellor is also expected to announce a cap for planned increases in rail fares, a nod to struggling commuters.

The government is hoping to have the scheme in place by January, which will then run for two years.

Under the proposals, a company taking out a £5 million loan would be able to borrow at 4% rather than the typical 5%, a saving of £50,000 a year.

A second scheme will see the government establish an investment fund with private sector investors, such as pensions funds to offer loans to larger companies.

A treasury spokesman said: "We all know that the cost of finance for smaller businesses has risen following the financial crisis. It's a problem people have been trying to solve since 2008, which is why these new schemes are much more radical than anything that has gone before.

"They should be a game changer for credit for small companies by cutting the cost of finance and over time opening up new options for how it is raised."

However, in a joint letter to the chancellor, his Labour counterpart Ed Balls and shadow business secretary Chuka Umunna said that credit easing alone would not halt the slide into recession.

"At the current rate, over 1,200 people a day are entering unemployment," said the letter.

"Businesses are going bankrupt at a faster rate than a year ago - despite your expressed wish for a private sector-led recovery.

"Access to credit will not in itself restore the confidence of business to invest. The country urgently needs a plan for growth and jobs."

Also speaking on The Andrew Marr Show, Balls said Labour would "look at the details of the credit easing plan before deciding whether to support it".

Speaking on Sky News, former chancellor Alistair Darling backed the idea of credit easing “if it works”.

“In principle it’s a very good idea, but the question businesses will have is how does that manifest itself in terms of loans being made available on the high street to businesses that need them.”

He warned that regardless of the scheme, no businesses were likely to open up new lines of investment or taking on new people if they didn’t have the confidence to do so.

“On its own, credit easing is not enough, but it is a welcome step,” he said.