In These New Times

A new paradigm for a post-imperial world

Golden rule changes ‘designed to save banks

Posted by seumasach on July 20, 2008


Or viewed from another perspective: what happens when you save the banks but everyone else goes under? What happens when consumption collapses, the pound tumbles and the state itself is bankrupt? With a dead stare, Britain looks into  the abyss.

Edmund Conway


20th July, 2008

The Treasury may be planning to raise the limit on public borrowing in an effort to give it “room for manoeuvre” for a potential rescue operation for the banking system, a leading expert has suggested.

  Gordon Brown's Golden Rule has lost its shine
Gordon Brown faces an increasingly rocky economy

Alistair Darling’s review of the borrowing rules he inherited from Gordon Brown may have been influenced by plans under consideration for a rescue of struggling mortgage banks, according to Peter Spencer, economic adviser to the Ernst & Young Item Club.

It comes amid growing disquiet about the funding position of Britain’s biggest mortgage lenders, with banking groups urging the Treasury or Bank of England to extend its mortgage support scheme to cover home loans issued since the start of the year.

The Chancellor confirmed this week that he has put the golden rule and sustainable investment rule “under review”.


Most attention has focused on the consequences of the economic slowdown for the public finances. As the economy enters a possible recession, tax revenues dry up, causing a deficit to balloon higher.

Spencer warned Darling may have to increase the debt limit to 50 per cent of GDP or beyond if he intends to accommodate a possible support scheme for embattled lenders.

“The Treasury knows the situation facing the mortgage lenders is pretty dire. I suspect that they may now be considering looking at gilt-edged funded long-term lending.”

Such funding would amount to an extension of the special liquidity scheme currently provided by the Bank of England. However, with the Bank’s Governor, Mervyn King, having expressed reluctance about extending the scheme to mortgages issued after the start of the year, Spencer said the Treasury or the Debt Management Office may have to step into the market with an alternative scheme.

The Treasury insisted it had given full warning of the potential changes to the borrowing rules in a Treasury Select Committee hearing earlier this year, but ranking Conservative committee member Michael Fallon said: “There was never a suggestion that the rules would have to be reconsidered. The Treasury has misled Parliament. This is serious, and the Committee will call Alistair Darling to testify in October.”

Meanwhile the influential Item Club is also set to warn in its summer report that the number of people out of work will hit the politically embarrassing 2m figure next year as Britain faces a real chance of a recession.

The forecaster will tomorrow issue its starkest forecast yet, warning that Britain will struggle to avoid recession in 2009, with growth predicted to stay at just 1 per cent. The news is a further blow for the Government, undermining its optimistic growth forecasts for both this year and next.

The Item Club will also warn that the plunge in house prices will continue in the coming months, with prices ultimately falling almost a fifth from their peak.

Finally, the forecaster is set to predict that the Bank of England will cut borrowing before the end of the year, even though it chose to freeze rates at 5 per cent earlier this month, with economists speculating that some committee members even recommended a rate rise.

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