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Finance

Treasury could rewrite rulebook as borrowing hits record high

18/07/2008

The Treasury could re-write its own borrowing rules, as public sector borrowing rose to £7.6 billion for June

Current rules limit the amount the government can borrow over an economic cycle to 40 per cent of nation income – but the rise to £7.6 billion, compared with £5.3 billion in June 2007 – means Alistair Darling looks set to miss the target.

Quarterly public sector borrowing is now highest since 1946 when records began.

With the slowing economy and property market hitting tax receipts, the government is stuck between borrowing more and breaking the rules or raising taxes.

New fiscal rules could be announced in the autumn pre-Budget report as a changing of the rules is allowed at the end of the economic cycle.

In response to reports of a rule fudge, a Treasury spokesman described the suggestions of changes as: "speculation".

"We have always said we would look at [the fiscal rules] when the economic cycle comes to an end."

The end of the cycle is set in the Office of National Statistics (ONS) Blue Book, which is due to be released on July 22nd.

A Conservative Party spokesman said: "If this is true, [rewriting of fiscal rules] puts the final nail in the coffin of Gordon Brown's reputation for economic competence.

"He repeatedly staked that reputation on his fiscal rules, and now we're told that the Treasury is having to re-write the rules because the government has lost control of the public finances."

Data from the ONS between April and June 2008 show the public sector recorded a deficit of £20.4 billion, compared with a deficit of £12.5 billion over the same three months in 2007.

"The public finances were substantially weaker… making it look ever more certain that the chancellor will miss his fiscal targets for 2008/09 by a large margin," said Howard Archer, chief UK economist at Global Insight.

"Regardless of whether the government's fiscal rules are revised or re-jigged, significant corrective fiscal action will clearly be required once the economy is on a firmer footing to get the public finances back in a healthy, sustainable condition.

"However, not only is the economy likely to struggle in 2009, but the government will be reluctant to raise taxes or cut spending significantly next year with a general election due by June 2010 at the latest. As a result, it seems certain that the next government will inherit an unhealthy fiscal situation and immediately have very tough decisions to make on taxes and public spending."