Another nail was hammered into the coffin of the Government's vaunted public finance rules yesterday. Gordon Brown, before an audience of business leaders, argued that the "responsible" course for the Government as Britain enters recession is to shed the restrictions that have, until now, limited public borrowing.
On one level this is uncontroversial. No one disputes that public borrowing needs to rise in the coming months. The only way ministers could balance the books under present circumstances would be to raise taxes or slash spending. Both would suck money out of the economy at the worst possible time, leading to a painful and prolonged recession. Letting the state credit card take the strain is the only realistic option.
Yet we must be clear about the consequences. Politicians hate to admit it, but public borrowing is only ever taxation deferred. We taxpayers will have to pick up the bill for this splurge in government borrowing in the fullness of time. But there is a more immediate danger. This extra borrowing is also likely to erode the value of the pound on international exchanges. Indeed, it is already doing so. If overseas investors start to shift their money out of sterling, it could make it more difficult for the Bank of England to bring interest rates down and thus leave us more exposed in the economic storm ahead.
There is further danger lurking in the political response to this downturn. As well as announcing the effective end of his "golden rule", Mr Brown hinted at boosting spending to "support economic activity". We must be wary of such talk. The fiscal impact of such projects might feed through when the worst has passed, and then serve to impede our recovery. And, meanwhile, all the aforementioned hazards of increasing the public deficit remain. Some form of fiscal stimulus should not be ruled out, but we need to remember the lamentable history of economies in which governments have played an over-active role in allocating resources.
We should note too that Mr Brown is demonstrating some considerable chutzpah throughout this turmoil. Yesterday, he carefully ignored the fact that ditching the golden rules flies in the face of everything he has been preaching about balanced budgets and prudence over the past decade. When Mr Brown, as Chancellor, praised himself for introducing these rules (a not infrequent occurence) he never said they were only applicable in the good times. He has also tried to present the recession and financial strain facing Britain as the unfortunate consequence of misjudgements made in other countries. One would not imagine, from the Prime Minister's recent statements, that British banks greedily bought up sub-prime mortgage securities throughout the boom years, without our former Chancellor raising so much as a questioning eyebrow.
Nor would one imagine from Mr Brown's recent behaviour that this is a politician who left public finances on course to register a record deficit, even when the boom was still in full flow. Instead of building up a surplus in the fat years, he chose to borrow. We need to maintain a sense of proportion, of course. Public finances would have had to dip deep into the red, even if Mr Brown had built up a fiscal surplus. And the global financial meltdown would have wreaked havoc here, even if Britain's banks had behaved with the utmost prudence. But all things considered, a little less triumphalism would seem appropriate from our Prime Minister. After all, the dominant lesson of recent months is that, the greater the pride, the greater the fall.Reuse content