January 30, 2008 / 4:00 PM / 12 years ago

Government may breach fiscal rules even without N.Rock

LONDON (Reuters) - Public finances have deteriorated to such an extent that the government could breach its fiscal rules even if the debt of stricken bank Northern Rock stays off its books, according to a leading think-tank.

A study by the Institute of Fiscal Studies on Wednesday showed the government would need to announce new tax increases worth 8 billion pounds in this year’s Budget to meet its existing targets — something the IFS judges unlikely in the current political climate.

It forecasts that disappointing tax revenues will force the government to borrow more than 40 billion pounds this year, two billion pounds more than the Treasury forecast last October.

Under existing policies, borrowing would show no improvement over the next two years and public sector net debt would hit the government’s ceiling of 40 percent of national income in 2009/10.

The IFS says the government would also break its “golden rule” — to borrow only to invest over the economic cycle — unless the new cycle lasts for at least a decade.

“We judge that the golden rule is more likely to be missed than hit, even ignoring the impact of Northern Rock,” said Carl Emmerson, the institute’s deputy director.

“The government begins this economic cycle with a much weaker outlook for the public finances than it began the last one.”

KNOCK FROM THE ROCK

The government could breach its fiscal rules at a stroke if the Office for National Statistics decides that Northern Rock should be classified as a public company. In this event, around 100 billion pounds of debt is likely to be added to the government’s books.

Still, the think-tank advises the government not to alter policy since the impact would be short-lived. Most, if not all, of the rise in public sector debt, would be reversed once Northern Rock’s mortgage book was sold.

“The appropriate policy response depends on the long-term impact on net debt, which remains uncertain for now,” it concludes.

The IFS’s recommendation that the government should be raising taxes comes just days after the International Monetary Fund gave its backing to an ambitious U.S. fiscal stimulus package.

Opposition Treasury spokesman George Osborne criticised the government earlier this week for leaving Britain with “no room for manoeuvre” to counter a downturn.

Osborne said Britain had the biggest budget deficit of any major European Union country and had wasted the opportunity to put the public finances on a sound footing.

Responding to the IFS report, Chief Secretary to the Treasury Yvette Cooper blamed the turmoil in world markets for the weaker outlook and stressed that the economy was in good shape.

“The UK faces current uncertainty from a position of strength,” she said.

“We are meeting our tough fiscal rules on borrowing and debt alongside record levels of investment in schools, hospitals and key infrastructure.”

Editing by David Christian-Edwards

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