Interview: Alistair Darling
Updated on 29 October 2008
Chancellor Alistair Darling talks to Faisal Islam about the changes to the fiscal rules.
Alistair Darling interview
So what will replace the Golden Rules? The Platinum Rules?
It's another day of epic economics.
The mood music from the treasury was playing down the impact of Alistair Darling's Mais Lecture. But the words in his speech and in my interview were clear: to rigidly stick to the fiscal rules would be 'perverse'.
Crucially, the treasury has conceded that both the Golden Rules are going to constrain spending in the coming recession. Unless they are changed. So welcome to the, err Silver Rules or Bronze Rules. The chancellor jokingly suggested 'Platinum Rules'.
My sense is that the Sustainable Investment Rule - the 40 per cent limit on national debt - will be lifted to a higher, as yet, undecided number. (Interestingly the 40 per cent number was not part of the original fiscal rules at all, just a reference to debt being kept at a 'stable and prudent' level') So perhaps 50 per cent or 60 per cent, in line with the European Commission limits will be the new definition of stable. The Golden Rule that deficits need to be made up by equal surpluses across a cycle will also be adapted. That is trickier.
So what does this mean?
It means that necessarily higher borrowing can be tolerated in the short term. It means that huge post-recession tax rises required to balance the budget over the cycle, can be parked. And it offers Alistair Darling the option of thinking about targeted tax cuts in the pre-budget report next month. The treasury has been talking the language of tax cutting for most of the past six months.
None of this comes for free. There is an amount of fiscal loosening, or extra borrowing, that will cause the Bank of England to react, by delaying interest rate cuts. I asked the chancellor if the Bank was being consulted, he said 'of course'.
The Old Lady has what it calls a 'reaction function' that describes its reaction to treasury tax and spending policy. The big question that might well be detaining the Governor Mervyn King, is whether the rapid descent into recession means that government spending can expand without fear of stoking inflation. His previously aired views on this suggest a hardline stance. He was rather sniffy about the unfunded £2bn tax cut that rectified Gordon Brown's 10p tax nightmare earlier this year. Has the October storm changed Mervyn King's mind?
And then the government needs to choose how to fiscally stimulate the economy. More tax cuts, or more spending? Each has a different response on growth and inflation. Each has a different response politically.
We'll find out at the pre-budget report next month.
So having established the principle of higher borrowing, I don't yet think they've established the amount of that borrowing. It will be a delicate balancing act. Not just in terms of the Bank of England's reaction, but in the international money and currency markets too.
So that's why the Mais lecture couches this palpable weakening of the rules within a firm promise of medium term discipline. Keynes wasn't about spending his way out of recession and 'losing all discipline', says the chancellor. Keynes challenged a prevailing treasury orthodoxy on balanced budgets in the 1930s, after recognising that times had changed. Mr Darling says he's doing something similar.
Leave aside the fact that the Rules have not even survived a recession which on current thinking will be as bad as 1990-92 - ie eminently conceivable (See the interview for the chancellor's answer to this).
The problem is that the new Rules will necessarily be less credible than the Golden Rules. As the treasury has forever conceded that tough times mean that they are liable to play the reverse alchemist and turn gold into copper. The treasury have got two or three weeks to come up with a quite crucial mini-budget, that minimises the loss of credibility and maximises the economic boost to Britain. Fiscal credibility is difficult to gain, and rather easy to lose.
