Golden rule 'could be broken'

Britain is facing an economic slowdown in 2008

Sunday, 10, Feb 2008 12:00

The government may be forced to break its fiscal rules to cope with the impending economic downturn, businesses have warned.

The British Chambers of Commerce (BCC) made the prediction as it forecast average gross domestic product (GDP) growth will fall from 3.1 per cent in 2007 to a weak 1.7 per cent in 2008.

Prime minister Gordon Brown has won significant political capital for keeping to his 'golden rule' of not letting government debt rising above 40 per cent of GDP.

On Thursday it was announced the roughly £90 billion of debt held by struggling lender Northern Rock would be included in that calculation, leaving many predicting the 40 per cent rule may be breached.

Now the BCC's economic adviser, David Kern, has warned government spending may exceed that level even before Northern Rock comes into consideration.

"The new UK economic cycle is starting with large current deficits and with excessive levels of total borrowing," he explained.

"Given the expected sharp slowdown in UK economic growth, breaching the government’s fiscal rules may be unavoidable in the next two to three years, even before one makes any allowance for the impact of the Northern Rock rescue."

With the BCC expecting GDP growth to only recover to two per cent in 2009 Mr Kern expects the government may have to be more fiscally active than has previously been discussed to limit the impact of the slowdown.

"The immediate policy priority is to limit the risk of a major economic downturn," he added.

"Small businesses are particularly vulnerable when the banking sector is under pressure, and the government may have to take special measures to support them if the credit crunch worsens."