UK's Darling-perverse to limit govt borrowing now

By Matt Falloon and Sumeet Desai

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)