Darling suspends budget rules to tackle downturn

Chancellor Alistair Darling suspended the government's self-imposed budget rules on Monday to tackle the economic downturn, and said he would wait until growth was recovering before targeting a balanced budget.

The fiscal rules were a hallmark of Prime Minister Gordon Brown's 10-year tenure as finance minister and a key element in his Labour Party's effort to present itself as a better economic manager than its Conservative opposition.

Yet Britain's sharp economic downturn following more than a year of global financial turmoil meant that the main part of the rules now had to be suspended, Mr Darling told legislators when he unveiled a fiscal stimulus plan worth over one per cent of GDP.

"In the current circumstances, to apply the rules in a rigid manner would be perverse and damaging. We would have to take money out of the economy, making a difficult situation worse," said Mr Darling.

The spending plans unveiled will give a £20 billion fiscal boost over the next three years, and push national debt towards £1 trillion.

Mr Darling said that he was setting a "temporary operating rule" within the main fiscal framework, which meant the government expected to attain a balanced budget only in the 2015-16 tax year.

Even that assumes the economy starts to recover in 2010, and only then will the government start to cut the deficit each year by a sum equivalent to 0.5 per cent of GDP each year on a cyclically adjusted basis.

"The government's forecasts for GDP are fairly optimistic, which might delay the recovery phase," said George Buckley, chief UK economist for Deutsche Bank.

"But Mr Darling had absolutely no choice whatsoever, given what has happened to the economy."

Britain's budget position looked bad compared to the rest of Europe, with a likely eight per cent deficit versus 4.5 per cent for the rest of Europe, he added.

Adrian Cooper, economic adviser to a business club backed by accountancy firm Ernst & Young, said the failure of the fiscal rules to survive the swings of the economic cycle showed the government had spent too much in recent years.

"What we've seen here is a massive change to the fiscal rules. The chancellor is essentially using the recession as a cover," he said.

"Even by 2012-13 he'll be borrowing 70 billion a year. That's almost 50 billion more than he anticipated at the budget in March. This underlines that the public finances were in a terrible state before the latest financial turmoil."

Mr Darling said that the government had run an average surplus of 0.1 per cent of GDP between 1997, when Labour took power, and the second half of 2006.