David Prosser's Outlook: The Bank's unwelcome message

Click to follow

The clock is ticking for Alistair Darling. There are now just two months to go until the pre-Budget report when the Chancellor – assuming he survives an autumn cabinet reshuffle – will almost certainly have to admit the Government is now on course to break its own fiscal rules.

Tomorrow's quarterly Inflation Report from the Bank of England is almost certain to be another nail in the coffin of those rules. Not only will the Bank concede that inflation is likely to increase by even more this year than it thought only three months ago, it will also lower its forecast for economic growth this year, probably to a figure of little more than 1 per cent.

In the face of those lower forecasts – in tune with similar reviews from almost every independent economist you care to mention – Mr Darling will be forced to trim his own predictions in October's PBR. And doing so will make it almost impossible to keep to the Government's own rule that public sector debt should not exceed 40 per cent of national income.

One option for the Chancellor is to attempt to fiddle those rules. It's no doubt tempting (so much so that last month, the Treasury quietly began floating the idea that the rules might be adjusted in order to ensure compliance).

A better idea, however, would be to take this one on the chin. The short-term reputational embarrassment will no doubt be damaging, but probably no more so than a row over whether Labour is trying to cheat by changing the rules to get out of trouble. Moreover, giving up on his fiscal straitjacket might just give Mr Darling enough wiggle room on tax to deliver something populist (a temporary suspension of stamp duty, say?).

Having come up with the fiscal rules in the first place, the Prime Minister will no doubt hate being forced to change tack just 18 months into his premiership. But Gordon Brown has bigger fish to fry – like the general election it will prove impossible to win without a change in economic fortunes that a freer hand for his Chancellor might just produce.

Comments