Treasury heads towards breaking golden rule

The chancellor’s decision to pay for the increase in personal allowances by borrowing £2.7bn will cause government to break its own golden rule, economists have warned.

The government’s finances are so burdened with hardly any room left for flexible decisions – but further borrowing could tip Treasury over the edge causing it to breach the sustainable investment rule, introduced by Gordon Brown, which requires Alistair Darling to keep outstanding debt at under 40% of gross domestic product.

In the budget, government forecasted that the figure would be 38.5pc in the current year, growing to 39.4pc in 2009/10 and 39.8pc in 2010/11, the Telegraph reported.

Jonathan Loynes, of Capital Economics, said that Darling might argue that other factors such as high oil prices, are responsible for the downward effect on borrowing and debt.

‘But if the economy slows as sharply as we expect, this will all be irrelevant - borrowing will rise much more sharply and the fiscal rules will be comprehensively broken,’ said Loynes.

According to the Institute for Fiscal Studies, the chances of a breach was 50/50, a probability that would increase if Mr Darling extended his proposals for more than one year.

Citigroup’s Michael Saunders said government had now lost any reputation it had developed for a prudent approach to public spending and borrowing.

‘The big worry is that fiscal slippage, plus the Government's repeated willingness to fudge the fiscal rules in order to claim that the rules have not been breached, will reinforce the MPC's worries about the rise in inflation expectations and possible slippage away from stability-oriented policies,’ he said.

Further reading:
Alistair Darling's borrowing puts Government on course to break golden rule

Darling's solution could prove costly, say economists