Treasury to set rules for next cycle

LONDON (Reuters) - The Treasury said it would set out fiscal rules for the next economic cycle when the current cycle ends, dismissing a report that it was about to relax its framework to allow more borrowing.

Prime Minister Gordon Brown, when Chancellor, established two rules to govern the public finances -- that the government only borrows to invest over the economic cycle and that public debt be limited to a prudent and sustainable level, defined as 40 percent of GDP.

Friday's Financial Times newspaper said Treasury officials were privately working on plans to reform the rules and this could be announced in the pre-budget report in the autumn, and possibly allow for greater borrowing.

Public debt is currently running close to the 40 percent ceiling.

A spokesman for the Treasury said the report was "pure speculation and based on comments that are over three months old."

"We have always said that at the end of this cycle we will set out the rules for the next cycle," he said.

Dating economic cycles is not an exact science. Treasury officials are waiting for the Office for National Statistics to produce its "Blue book" revisions at the end of September to get a better idea of when the current cycle might end. There has been speculation it may have ended in the second half of 2006.

Government borrowing data for June due on Friday are expected to show the public finances are in bad shape, leaving the Labour government little leeway to spend more as the economy slows down.

While that clearly increases the pressure on the government to adjust the rules to increase borrowing, the ONS revisions could also increase the level of GDP significantly and thus give it extra margin without changing the fiscal rules.