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Gordon Brown’s two fiscal rules, devised a decade ago, are looking well past their sell-by date. It is up to his successor as chancellor, Alistair Darling, to decide whether they deserve a new lease of life.

The consensus outside government is a resounding “no”. Academic experts and think-tanks, including the Institute for Fiscal Studies, have all suggested improvements. The lack of credibility in the rules was highlighted in an FT survey of more than 50 City economists in which almost none used them as a reference point in the assessment of the public finances.

Three main credibility problems hamper the rules’ effectiveness. First, the golden rule – only to borrow to invest over the economic cycle – is dependent on the Treasury’s definition of the cycle, which is something eminent public figures such as Mervyn King, the governor of the Bank of England, believe is simply unmeasurable with precision, even with the benefit of hindsight.

Second, this rule is backward looking. Last year, Mr Brown gave himself extra leeway to increase borrowing by £12bn on the basis of official revisions to the economic history of 1999.

Third, the golden rule and the sustainable investment rule, which limits public sector net debt to 40 per cent of gross domestic product, could give public bodies strong incentives to engage in creative accountancy.

The Treasury spent months tinkering with the structure of Network Rail in 2002 to ensure its borrowings were not counted as public debt and many public bodies know that the private finance initiative is the only game in town for capital expenditure precisely because its use has, until now, kept the debt off the government’s books.

But change could be afoot as events have conspired to give the Treasury a once-in-a-decade chance to consign all of these problems to the dustbin of history.

The moment arises because on the Treasury’s own methods of calculation, highly suspect as many think they are, the economic cycle finished at the end of last year.

In October’s pre-Budget report, Mr Darling will be able to say that the cycle is over and the government did, indeed, meet both fiscal rules over a 10-year cycle that started in 1997 and ended in 2006.

Then, he could revise the rules to make them better able to gain credibility. Here the changes to accounting standards help because the technicality of bringing up to £30bn of PFI into government net debt has the potential to bust the sustainable investment rule. Even though the government has not undertaken any new spending commitments and tax revenues have not been weak, the rule on its past definition would be broken and that would make little sense.

Mr Darling could argue that since nothing apart from an accounting standard has changed, it was time to revise higher the limit on the sustainable investment rule, particularly if other dubious forms of pseudo-government borrowing, such as Network Rail’s debts, were also included in the figures.

The golden rule could also be revised to remove the cycle measurement and to make it forward-looking without too much political difficulty, since the Conservatives have already proposed such a change.

The Treasury is, however, cautious about making these changes. Mr Darling told the FT that the rules were always under review but, “people want to make sure that government is going to conduct itself in a way that it is prudent in relation to the finances, both in terms of the golden rule and the sustainable investment rule”.

His difficult decision over the coming months will be whether to stick to rules that generate wry smiles and raised eyebrows among economists, or seize a rare chance of improving the government’s fiscal framework at an opportune moment.

Copyright The Financial Times Limited 2017. All rights reserved.
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