Chancellor to break Golden Rule again

Pre-Budget Report: Alistair Darling may be forced to raise taxes after an election victory to balance the books
Click to follow
The Independent Online

Economists have warned that a dismal double whammy of rising debt and slowing growth will force Chancellor Alistair Darling to ditch or fudge his predecessor's "Golden Rule", amid fears that taxes will have to rise to pay for public spending.

The depth of the hole left by Gordon Brown for his successor at No 11 will be revealed on Tuesday in Mr Darling's first pre-Budget report (PBR). Analysts have warned that the Chancellor has been left with little room to conjure a pre-election sweetener for voters.

Mr Darling has already signalled that a cut in growth forecasts for 2008 is a certainty, although it is likely his predictions will still be more bullish than most in the Square Mile. Michael Taylor, senior economist at Lombard Street Research, said: "The public finances aren't in as good a shape as Brown said they would be in March and a protracted slowdown is only going to widen the deficit. He is clearly in danger of breaching the Golden Rule."

To comply with the rule, the Chancellor's spending must not excede revenues over the whole of the economic cycle.

Before becoming Prime Minister, Mr Brown infamously altered the starting date of the cycle, a move that enabled adherence with the self-imposed directive.

David Kern, economic adviser to the British Chambers of Commerce (BCC), said that Tuesday's figures would eventually make further fudging necessary.

"It'll have to be modified to restore any credibility," said Mr Kern. "We're starting the cycle with a deficit this time around. Things are only going to get worse."

Graham Leach, chief economist at the Institute of Directors, said: "I'm really surprised they let the cat of out of the bag early on Crossrail. Expect him to use the Comprehensive Spending Review to drown out the PBR because his hands really are tied. Perhaps the only place he can surprise is health."

Robert Chote, director at the Institute of Fiscal Studies, agreed the big story was likely to be health, although the extent to which London's Crossrail project was "squeezing everything else" was likely to be revealed.

"Taxes will go up because that's what Labour governments have done after elections – should we have one soon," said Mr Chote.

The City will have its eye on possible tax hikes, with the private equity industry hoping that Mr Darling will avoid tinkering with the controversial taper relief rules that have benefited the industry's top earners.

Tuesday's PBR will come ahead of the publication of Thursday's Quarterly Economic Survey from the BCC, which is expected to show further deterioration on the high street.

The BCC has consistently called for a relaxing of monetary controls in the face of mounting evidence of a slowdown in the real economy.