Comment: The Golden Rule is tarnished

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The Treasury has condemned as speculative a report in today's Financial Times that the Prime Minister may be preparing to ditch two of the rules that once underpinned his reputation for economic prudence. The first, or Golden Rule, is that over the economic cycle, the Chancellor can only use borrowing to fund investment in long term projects like schools and roads, not for day-to-day spending. The second is that public borrowing may not exceed 40 per cent of national income, or GDP. It seems likely that the Treasury will simply declare that the present economic cycle has drawn to a close and new rules will apply. The likeliest time for such an announcement is when the pre-Budget report is delivered in September, on the basis of economic figures from the Office of National Statistics.

The upshot is, the Government will feel more free than ever to borrow itself out of its difficulties. And the pressures making for greater borrowing are very real. Public-sector borrowing was 50 per cent higher than last year for the first two months of the tax year. The Government is faced with the worst possible vicious cycle, whereby lower employment produces higher social security spending and lower income tax. Meanwhile, pressure from higher prices on spending means less VAT, while fewer house sales produce less stamp duty. The downturn also has an effect on capital gains tax and corporation tax. Not all of this unlovely scenario is the fault of the Government but its inability to respond to the situation except by rewriting its own rules is. The extent of government spending - some of it kept off the balance sheets by Private Finance Initiatives - is squarely Gordon Brown's responsibility. He spent in the fat years; he has no room to manoeuvre in the lean ones.

Mr Brown's image on economic competence was massively tarnished in his transition from Chancellor to Prime Minister but scrapping the Golden Rule may well put paid to it. That was his real claim to his present job. Rewriting the rules may give him short-term breathing space but the damage is to his reputation.