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Brown Pledges Spending, Borrowing to Cushion Economy
27 October 2008 @ 16:01

Prime Minister Gordon Brown said he is ready to increase spending and borrowing to shore up the U.K. economy as it falls into its first recession in 17 years.

The government needs to maintain investment in job-creating public works as part of a ``comprehensive'' effort to counter the slump that includes the 50 billion-pound ($79 billion) bank- rescue plan and Bank of England interest-rate cuts, he said.

``The responsible course of action is more borrowing for the investment that is necessary both now and for the longer term,'' Brown told an audience of economists and businessmen in London today. He said borrowing will fall as a share national income when the economy recovers and generates more tax receipts.

The comments indicate he and Chancellor of the Exchequer Alistair Darling are preparing to abandon a decade-old pledge to limit debt to 40 percent of gross domestic product. Brown last week acknowledged that Britain is tipping into a recession after the economy shrank in the third quarter at the fastest pace since 1990.

Darling may use his Mais lecture on Oct. 29 to formally scrap the fiscal rules that Brown introduced in 1997 when the Labour Party came to power, The Financial Times reported today.

He is planning to replace them with new targets for cutting borrowing once the economy is on a stronger footing, and will announce the new fiscal regime in his pre-budget report this year, the newspaper reported, without saying where it got the information.

Public Works

The government last week pledged to bring forward projects scheduled for after 2010 to spur the U.K. economy, which contracted 0.5 percent from the second quarter as the financial crisis ravaged industries from banking to construction.

Debt was 37.9 percent of GDP in September, compared with 36.2 percent a year earlier. Including the liabilities at Northern Rock Plc, the mortgage lender that was nationalized in February, it was already above the ceiling, at 43.4 percent.

Debt may rise to 50 percent of national income when the recent nationalization of Bradford & Bingley Plc and the pledge to buy stakes in cash-strapped banks are taken into account, according to the Institute for Fiscal Studies.

``You maintain the high levels of investment that you've got to prepare for the future,'' Brown said. ``You help people fairly through difficult times, and that means that your fiscal policy must support your monetary policy. There is no one measure; there is a comprehensive set of measures that are going to take us through these difficult times.''

`Out of Necessity'

The Conservative opposition says Brown spent too much when the economy was growing during his decade as finance minister.

``What they're talking about is borrowing out of necessity, not out of virtue,'' George Osborne, Conservative economic spokesman, said today on BBC Radio 4. ``The problem here is that the borrowing situation is very, very much worse because we enter into this recession with very weak public finances. That's not a deliberate plan; that is what economic circumstances dictate.''

Britain had its biggest budget deficit since 1946 in the six months through September as tax receipts stagnated, and economists say the shortfall may reach 7 percent of gross domestic product over the next two years, more than double the 3 percent European Union limit.

A group of economists wrote to The Sunday Telegraph newspaper yesterday, warning against further government spending as a way of stimulating the economy.

Insofar as slowdowns ``are to be managed at all, the best tools are monetary and not fiscal ones,'' the 14 economists wrote. The focus on public projects and higher spending is ``misguided.''
source: bloomberg

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