If, as reported when Euromoney was going to press at the end of September, the European Commission was about to launch its Excessive Deficit Procedure (EDP) against the UK, it will demonstrate how the country's public deficit problems cannot be disguised for much longer. According to Bank of America research, UK borrowing in the first five months of the 2005/06 financial year was £20.8 billion, higher than in the same period in any of the previous three years.
Because it is outside the eurozone, the UK will not face financial sanctions – for those states that do not use the single currency, EDP is a monitoring rather than an enforcement tool. And if the UK's recent record is anything to go by, it appears that the simplest way of dealing with inconvenient fiscal rules is to ignore them.
The UK's Golden Rule prohibits borrowing to fund current spending, as distinct from investment, by saying that the UK's budget should balance over the course of the economic cycle. It is almost certainly being violated.
The Sustainable Investment Rule commits the UK government to keeping national debt below 40% of GDP. The Golden Rule has attracted more headlines, but breaking it has a knock-on effect, putting extra pressure on the Sustainable Investment Rule.
If it borrows to finance not just investment but current spending, any government borrows at a huge rate. Although fiscal figures are notoriously hard to predict, Ernst & Young's economic forecast group the Item Club reckons that if the UK government borrows £15 billion a year to pay for spending and the same again for investment, it will borrow nearly £40 billion this year. At that rate, government borrowing will reach its 40% cap under the Sustainable Investment Rule in 2007 or 2008.
The Golden Rule and the Sustainable Investment Rule are self-imposed. But that's no reason not to stick to them. A responsible individual borrows to finance investment – for example a house purchase – not spending. The UK government is behaving like someone who has taken out a mortgage to fund his beer consumption. This is ludicrous.
The Sustainable Investment rule will become a binding constraint over the next few years, and the UK will have to go looking for bigger fiscal fudges to meet its own rules. If that's how it treats its own borrowing limits, why should the UK take more notice of the EU's criteria? The European Commission might as well save its breath.