The reasons for the Government's rethink on its fiscal rules became crystal clear yesterday as public borrowing hit record levels.
Public sector net borrowing for the first quarter of the financial year was £24.4bn, the biggest quarterly figure since records began in 1946. The figure was up from £14.7bn a year earlier. The current budget deficit for the period was £20.4bn, also a record high.
The Government is considering changing its fiscal rules after the Office for National Statistics (ONS) provides data indicating the end of the economic cycle in September. The Chancellor, Alistair Darling, said: "As I said 12 months ago, in the very first interview I gave as Chancellor, we always keep these things under review... I'll report at the pre-Budget report to the House of Commons this autumn on where I believe we are."
As chancellor, Gordon Brown established two rules for the public finances – that the Government should borrow only to invest over the economic cycle and that public debt should be limited to 40 per cent of gross domestic product. Public debt is running close to 40 per cent and analysts say the Government is close to breaking the limit as the economy is slowing and pressure to spend is rising.
The Treasury insisted that the Government has always said it would revisit the rules at the end of the current cycle to make sure the framework is appropriate for the following cycle. The original rules were put in place to instil discipline when the Government was planning large-scale investment in infrastructure and public services but might not be required if the aim is to lock in investment, the Treasury said.
Howard Archer, chief UK economist at Global Insight, said: "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."
The prospect of the Government relaxing its rules to borrow more sent jitters through markets. Sterling fell against the dollar and euro on investors' growing sense that the UK economy is in a sharp downturn that the Government has little power to counter.
Officials are waiting for the ONS to produce its "Blue Book" revisions at the end of September to get a better idea of when the current cycle might end. Some economists estimate that the cycle could have ended as early as the second half of 2006. A Treasury spokesman said: "The Government is committed to maintaining sound public finances. We have made consistently clear for some time now that we will set out the fiscal rules for the next economic cycle at the end of the current cycle."
Growth of tax receipts weakened to £2.8bn in the three months to the end of June as spending rose by £8.8bn. Taxes increased just 2.5 per cent in June, with VAT falling 4.6 per cent and corporation tax rising just 0.3 per cent. That trend could worsen as the economy slows down sharply.
With consumers reining in spending, the housing market falling and businesses suffering from the slowdown, tax receipts are likely to fall sharply. Spending could be sent higher by rising unemployment, which jumped in June, squeezing the public fin-ances further as the economy stalls. The Chancellor has also nnounced concessions to cash-strapped households by scrapping the 10p tax rate at a cost of £2bn and delaying a 2p rise in fuel duty planned for October.
Mr Darling is forecasting growth of more than 2 per cent this year and next but most economists think he is over-optimistic. Mervyn King, the Governor of the Bank of England, has said the economy could tip over into recession as banks tighten lending into the slowdown because of financial turmoil.Reuse content