LONDON, Oct 29 (Reuters) - Britain is moving into recession
and the government will need to spend more and forget about its
self-imposed limits on borrowing for the time being, finance
minister Alistair Darling said on Wednesday.
Darling said he would set out in his forthcoming pre-budget
report how the government would keep fiscal policy sustainable
over the medium-term but said "to apply the fiscal rules in a
rigid manner today would be perverse".
"The UK, as well as other countries, is moving into
recession," Darling said in a speech in London.
"We are facing a constellation of short and long-term
challenges, placing extraordinary pressure on the tax revenues.
(But) people should be in no doubt that government will take the
decisions necessary to ensure sustainability in the medium
term."
The British economy shrank 0.5 percent in the three months
to September and is expected to contract into next year, eating
away at tax receipts and raising social security spending at a
time when government borrowing is already at record levels.
That has left the Labour government little option but to
suspend its strict fiscal rules so that it can help households
and businesses through the downturn.
Prime Minister Gordon Brown set out two fiscal rules a
decade ago which state that the government should only borrow to
invest over the economic cycle and that overall debt be kept
below 40 percent of GDP. Abandoning them could entail a blow to
his credibility.
"We can boost the economy only because we have built a
foundation of sustainable public finances, because governments
everywhere must live within their means, and I will ensure that
we do this in the medium term," Darling said.
RECORD BORROWING
British public sector net borrowing hit 37.6 billion pounds
($60 billion) in the six months to September, the highest
half-year total since records began in 1946 and making Darling's
full-year forecast of 43 billion pounds look very optimistic.
Excluding the nationalisation of failed mortgage lender
Northern Rock, Britain's net debt stood at 37.9 percent of GDP
last month versus government forecasts of 38.5 percent at the
end of the fiscal year.
Darling said there was no reason to change the
inflation-targeting remit of the Bank of England but said
developments in asset prices can affect inflation and should be
taken into account.
"The Monetary Policy Committee can support, in line with its
statutory requirement, the government's wider economic
objectives," he said.
Looking beyond Britain, Darling urged better co-operation
between the International Monetary Fund and Financial Stability
Forum to help avoid future financial crises.
"Next year, the UK will hold the presidency of the Group of
20," he said. "We will call on world leaders to increase the
role -- and funding -- of the international financial
institutions."
(Editing by Stephen Nisbet)
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