Magazine article Public Finance

Darling Scraps the Fiscal Rules but Leaves Gap in Their Place

Magazine article Public Finance

Darling Scraps the Fiscal Rules but Leaves Gap in Their Place

Article excerpt

Economists have raised questions over the government's plan to bring borrowing back to 'sustainable' levels after a Keynesian boost in spending to lift the economy.

Chancellor Alistair Darling pledged to respond to the worsening economic crisis by 'supporting the economy now and maintaining public investment while at the same time ensuring that we live within our means in the medium term'.

Giving the annual Mais lecture at Cass Business School on October 29, the chancellor finally ditched the governments self-imposed fiscal rules, in a move that had been predicted by economists for months.

Figures released earlier in October by the Office for National Statistics showed that debt had already burst through the ceiling of 40% of gross domestic product set in the rules with the nationalisation of Northern Rock taken into account.

Darling's move had also been widely trailed ahead of the original date for the lecture, which was postponed for three weeks when the UK banking crisis erupted.

But Darling attributed the scrapping of the fiscal rules to 'unprecedented turbulence in the world economy'. He quoted the economist John Maynard Keynes, saying: 'When the facts change, I change my mind.'

The chancellor argued: 'To apply the fiscal rules in a rigid manner today would be perverse. We would have to take money out of the economy, exacerbating an already difficult situation.

'These are extraordinary times. The economy is facing unprecedented global shocks, and we need a new approach that is fit for these new times,' he said.

'I will set out plans at the PreBudget Report that demonstrate our commitment to keeping the public finances on a sustainable path.'

But Jonathan Loynes, chief European economist at analysts Capital Economics, warned that bringing borrowing levels down again would be achievable only in the longer term.

Borrowing would remain 'very high and still rising over the next five years'. Loynes added: 'I think this is a job for the longer term.'

Gemma Tetlow, senior research economist at the Institute for Fiscal Studies, said the chancellor's speech had left questions unanswered.

'The government certainly still needs to set out clear medium-term plans for the public finances,' she said. …

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