Darling Signals Rift With Brown, Saying U.K. Must Curb Deficit

By Gonzalo Vina

June 18 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling, signaling a clash with Prime Minister Gordon Brown over spending, said the U.K. government must make tough decisions to curb the budget deficit.

“We must live within our means,” Darling told bankers at the annual Mansion House dinner in London last night. “There are tough choices ahead. I will continue to do whatever is necessary to ensure sustainable public finances.”

Darling’s call came as Brown emphasized the need to lift spending and protect state-funded schools and hospitals. With an election due in the next year, the prime minister sees government support for the economy as a dividing line with the Conservative opposition, which says he can’t afford it.

Britain expects the biggest budget shortfall in the Group of Seven nations as the worst recession since World War II curbs tax receipts, forcing the Treasury to raise a record 220 billion pounds ($330 billion) from investors. Darling’s comment is aimed at appeasing Standard & Poor’s, which has threatened to scrap Britain’s top-notch credit rating without clear action on debt.

“The economics is giving the message that the deficit needs to come down, but the politics suggest they won’t be doing it,” said Philip Shaw, chief economist at Investec Securities in London. “The fiscal profile is unsustainably high despite the fact that there is a plan to bring it down.”

Dividing Lines

Brown and his Cabinet ally Ed Balls, the education secretary, are pushing for higher spending as the centerpiece of the election campaign. Brown told the GMB union earlier this week that the ruling Labour Party had to “fight as we’ve never fought before” for well-funded public services.

In Parliament yesterday, Brown said “capital expenditure will grow until the year of the Olympics” in 2012, appearing to overrule the Treasury’s budget plan. Darling in April estimated investment on capital projects including new hospitals and railroads will decline to 26 billion pounds in 2012 from 44 billion pounds in the current fiscal year.

“His statement to Parliament that capital spending will grow until 2012 is just plain dishonest,” said George Osborne, a Conservative lawmaker who speaks on finance. “The truth is that real spending will have to be cut whoever is elected.”

Further signs of a different emphasis have also come from Balls who this week told BBC Radio Five Live spending on health and schools will rise “in real terms” after 2011. Darling said he wouldn’t “set in stone detailed spending plans for individual departments five years ahead.”

Taxes for the Rich

Darling also suggested that businesses and the rich may have to pay more tax, saying that “those most able to bear the burden” will “make the greatest contribution” to stabilizing the public finances.

He said he was “fully aware” of the need to keep tax rates “competitive” after increasing the top rate of tax for high earners to 50 percent.

Money raised from selling nationalized banks and other state assets will be used to pay down debt, reducing the need for higher taxes to curb the deficit, Darling said. For now, that debt will continue to rise to protect the economy.

“To attempt to balance the books now, simply by cutting spending across the board, would choke off the recovery, he said. “It would be sheer madness.”

Slower spending and tax increases are almost unavoidable, whichever party takes office after the next election, given that the budget deficit is forecast by the Treasury at 12.4 percent of gross domestic product in the current fiscal year, the most in the G-7.

King’s View

Bank of England Governor Mervyn King added his voice to those warning the government about its debt burden, which will more than double to 1.4 trillion pounds by 2014.

“Five years from now national debt, as a proportion of national income, is expected to be more than double its level before the crisis,” King said at a speech alongside Darling. “It is also necessary to produce a clear plan to show how prospective deficits will be reduced.”

The government in April said it will reduce net investment by 40 percent over the three years starting April 2011, while increasing day-to-day spending by 0.7 percent in real terms. That compares with 3 percent gains each year between 2004 and 2008. The Conservatives say that higher debt servicing costs and inflation will mean cuts in real terms.

‘Credibility Problem’

“Darling is right that the government needs to address the deficit,” Martin Weale, director of the National Institute of Economic and Social Research. “I am not sure that the government has a credibility problem, but it may develop one.”

Earlier yesterday, two former chancellors who served in Conservative governments said Britain’s debt load may be a drag on the recovery.

Nigel Lawson, who served as chancellor under Conservative Prime Minister Margaret Thatcher from 1983 to 1989, told the BBC that “the public finances are the most appalling mess” and are “a real threat to this country.”

Norman Lamont, the finance minister from 1990 to 1993 said in a speech in London, “Unless you clean up the balance sheets completely of banks, a recovery takes a very long time and recession is more protracted.”

To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net;