16 October 2008
By Vivienne Russell
Rewriting the fiscal rules to bring them in line with those in the rest of Europe could provide Chancellor Alistair Darling with some much-needed wiggle room when he comes to deliver his Pre-Budget Report next month.
Steve Wilcox, professor of housing at the University of York, said the chancellor could adopt the European Union's narrower definition of public sector debt, one that excludes public corporations such as council housing and, now, the part-nationalised banks. The debt limit set out in the Maastricht Treaty is also significantly more generous at 60%, rather than the 40% in the UK government's self-imposed rule.
Wilcox said the current fiscal rules were broken. 'If we moved in line with Europe in terms of adopting their approach to debt, by retaining the notion of being flexible over the economic cycle in terms of annual levels of borrowing, you'd have a relatively coherent system that has bags of space relative to the spending limits,' he told Public Finance.
'One of the problems we've got is Gordon Brown's prudential rules were more prudent than those of the rest of the world… He invented them in the good times to be reassuring but they're a pain in the bad times.'
Economic commentators agreed that the bank bail-out announced this week will send public debt soaring to levels last experienced in the aftermath of the Second World War. Robert Chote, director of the Institute for Fiscal Studies, said that adding the £1,800bn of Royal Bank of Scotland liabilities to public sector net debt could push debt levels to £2,500bn, almost twice national income.
Darling's statement to MPs on October 13 said that adding the banking liabilities on to the government's balance sheet would not be appropriate. 'As was the case with the temporary nationalisation of Northern Rock, the most appropriate measures of government borrowing and debt to judge the position of the public finances will be ones that exclude the government's stake in the banking sector,' he said.
PFoct2008
