Bank chief widens rift with Brown

The division between the Treasury and the Bank of England over the health of the public finances widened yesterday when the Bank's governor, Mervyn King, openly questioned Gordon Brown's interpretation of the so-called golden rule.

Asked during his quarterly press conference about a recent change by the Treasury to the year in which it says the current economic cycle began, thus handing Mr Brown an extra £11bn to meet his cherished golden rule, Mr King could not resist adding his own incredulity to that of many City experts.

"The Bank and the Treasury have a very different view of how to think about the cycle. We don't like this sort of fixed dating," he said.

"At school we have sine curves when doing physics but, whatever the economic cycle is, it certainly isn't a sine curve," Mr King added, referring to the regular S-shaped graph typical of radio waves.

Mr Brown said last month that revisions to economic growth data going back several years had moved the estimated start-point of the current economic cycle from 1999 to 1997. The golden rule states that budget surpluses and deficits excluding investment should balance each other out over the ups and downs of the cycle. Until recently the Treasury was insistent that the cycle began in 1999 and would finish this year.

Now it says it began in 1997, neatly pulling the budget surplus of 1998 into its calculation for the golden rule, which had been in danger of being broken because of high spending by the government and sluggish tax revenues.

Mr King voiced the thoughts of many independent economists when he said: "Whatever happened seven or eight years ago, it does not change the underlying fiscal position."

The Bank governor last year expressed his concern at the size of Mr Brown's deficits and subtly urged him to bring them under control.

This time, Mr King, pointing out the uncertainty in determining the exact state of the economy at any particular time, said the Bank did not know precisely where the economy was now or where it had been recently, because of revisions to growth data by the Office for National Statistics.

"Indeed, the chancellor does not even know where it was seven or eight years ago," he quipped. He was not even sure whether it made sense to think about the cycle as a well-defined phenomenon.

That will not please officials at the Treasury who have just released a highly technical, 50-page document trying to do just that.

The governor said it was important that the chancellor meet his fiscal rules. He noted that the Treasury was forecasting the share of tax would rise by two percentage points of national income in the next few years, thus bringing revenues back in line with spending.

"The Treasury does not think this will need a rise in tax rates," he said, although almost all independent commentators believe taxes will have to rise by at least £10bn a year, equivalent to over 3p on the basic rate of income tax, to ensure the golden rule is met.

The shadow chancellor, George Osborne, said: "While Gordon Brown may have moved the goalposts so he can say he has met his golden rule, the governor warns that he can't go on borrowing money at the rate he is today.

"That's why most economists think taxes will have to go up to pay for Labour's spending plans."