Britain will increase government spending to cushion the country's fall into recession, Treasury chief Alistair Darling said Wednesday, suggesting he intends to drop decade-old fiscal rules limiting borrowing. “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,” Darling said in a speech. But he said the government would return to the rules “once these shocks have worked through.” On Tuesday, Prime Minister Gordon Brown set the stage for Darling to abandon the fiscal rules, telling reporters: “We met our rules over the economic cycle...but we are in unique times.” In 1997, Brown, who was then Treasury chief, introduced a rule limiting government borrowing to less than 40 percent of gross domestic product. Brown also vowed that public spending would not exceed tax revenue over the course of a complete economic cycle - his “golden rule.” But those rules are now cracking under the pressure of falling tax revenue, a shrinking economy and an unprecedented 37 billion pound ($59 billion) government commitment to rescue Britain's cash-strapped banks. Britain had its biggest budget deficit since 1946, when records began, during the six months through September. At 37.6 billion pounds ($60.5 billion), the deficit was 75 percent higher than the same period last year. Meanwhile, government debt climbed to 37.9 percent of national income in September, up from 36.2 percent a year ago. Economists predict that the government won't be able to stay below the 40 percent ceiling - which it crossed briefly earlier this year after taking Northern Rock bank into public ownership - for long, especially since it is planning on increasing government spending through borrowing to help with the economic downturn. “The extra borrowing means that public sector net debt is likely to breach Gordon Brown's ceiling of 40 percent next year” even excluding the impact of the multibillion pound bank bailouts, said Robert Chote, director of the Institute for Fiscal Studies. Including those costs, Chote predicts that debt is likely to reach closer to 50 percent of GDP by early next year. Darling did not say how much debt he thinks the country will sink into, but said Britain would set its finances in order once the short-term economic shocks had passed. “Governments everywhere must live within their means - and I will ensure that we do this in the medium-term,” he said. David Cameron's opposition Conservative Party has blamed Brown for spending too much, and not saving enough.
