July 18, 2008 | posted by Michael Baxter in Fiscal rules |

Well it’s a bit embarrassing. But is it a good or a bad move?

Some time ago we said there were two personae to Gordon Brown. There was the Dr Prudence of the early years of his chancellorship. Then the Mr Proliferate of the latter years.

Dr Prudence, it appears, is well and truly dead. Well, actually, that probably happened a long time ago, we are now just seeing the consequences of that death.

The government is considering ditching its sustainable investment rule. This is the one that limits total net debt to 40 per cent of GDP.

You can understand why. With corporate profits falling, with VAT receipts sure to tumble, presumably stamp duty receipts have practically ground to a standstill – at least on property transactions; unemployment benefit will rise, governments finances are stretched all right.

In fact, arguably, when it bought Northern Rock, government debt had already exceeded the 40 per cent level – although that is a little unfair. To arrive at that conclusion, Northern Rock liabilities were counted, but assets virtually ignored.

Gordon’s other beloved rule, the Golden Rule, which limits government borrowing to capital items only over the course of an economic cycle, is still okay – but only thanks to a shameless juggling with the facts – changing the timing of the economic cycle to suit the rules, plus a host of other changes – for example defining expenditure on road maintenance as a capital item.

Gordon set his credibility by his rules, and now they are being changed. Vince Cable said it rather well this morning on the Today programme when he said: “The government sets it own exam papers, and then marks them.”

And yet, not all of the criticism is fair.

The sustainable investment rule does not actually say net debt to be no more than 40 per cent of GDP. It just says net debt to be below a certain level of GDP – the level to be defined with each cycle. This cycle has just begun, so the government is free to change the level.

More to the point though, actually, the UK’s total net debt is quite modest. It is much higher in the US and most other European countries. So when David Cameron talks about the UK borrowing being greater than every country in the world bar Pakistan and Mexico, he is being a little unfair.

What he really means is that our new borrowing is high. Our total borrowing is actually modest.

So the UK government has an opportunity. It could conceivably borrow a lot more money. The snag is that there are structural problems with the economy. Our current expenditure is too high.

And this is where GB will surely get it wrong.

The UK can justify borrowing more – a lot more, providing the money is used to fix the structural problems. Maybe in trying to reduce unemployment in those regions of the country, places such as Hull, where it is still far too high.

The snag is that any borrowing the government undertakes will probably be used to fund more of the same old same old, to plug the gap between spending and receipts. That would be a disaster. Spending to fix structural problems would be a very smart idea.