New Labour's fiscal rules are likely to be modified as the consequences of the economic slowdown hit home. Public sector borrowing was 50 per cent higher in the first two months of the financial year. Public borrowing rose by £9.2 billion last month, well above City forecasts of £7 billion. Borrowing of £4.4 billion between April and July as a postwar quarterly record.
Tax revenues, particularly VAT and stamp duty, are being hit by the economic downturn. In June, national insurance payments fell 8.3 per cent compared with a year earlier, VAT payments fell by 4.6 per cent and corporate tax payments were flat. In an interview with The Times Chancellir Alastair Darling admitted that taxpayers are at the limit of what they are willing to pay to fund public services. He revealed that he told Cabinet ministers this week that there would be no more money for schools, hospitals, defence, transport or policing.
Economists agree that if today's tight public finances are the legacy of past profligacy, it would be unwise to clamp down at the start of a downturn. One of the simplest options would be to raise the arbitrary ceiling on net debt, say to 45 per cent of national income.
The key issue is not the exact figure that is adopted, but whether any changes are introduced in the monitoring of the constraint. At present the Treasury is judge and jury of whether it is abiding by its own rules. Many analysts believe that there should be an independent monitoring body with an obligation on the Treasury to explain its policy if that body thought the rules were being broken - just as the Bank of England has to explain itself if inflation goes outside the target range.
New Labour shifted towards constrained discretion in economic policy rather than a more pure rules based stance. Because fiscal policy is about 'getting and spending' it is more difficult to effectively constrain than monetary policy.