Economy Support To Continue

(Reuters) – THE GOVERNMENT MUST KEEP BORROWING until recovery is entrenched, and one set of good economic data will not be enough to show this, Chancellor Alistair Darling told Reuters on Wednesday.

Darling said it was better to continue tax and spending measures to boost the economy for too long, than cut them off prematurely and risk plunging Britain back into recession.

His comments come ahead of the publication of preliminary third quarter gross domestic product figures on Friday, which economists expect to show 0.2% growth on the quarter following five consecutive quarters of contraction.

‘We must support the economy until we’re sure the recession is over,’ Darling said at a Reuters Newsmaker event.

‘Some are tempted to think the crisis is over. It’s not… and one set of data showing positive growth will not be enough. We need to ensure that the recovery is embedded.’

Britain faces an election by June next year, and the Conservatives, who lead opinion polls, accuse the Labour government of letting the public finances get out of control when tackling the recession.

Darling said financial markets were already more confident about the fiscal outlook than earlier this year, and that he would soon unveil further measures to tackle the budget deficit.

‘They’ll see evidence of our intentions to get the deficit down in the pre-Budget report,’ he told Reuters in an interview.

‘Maintaining confidence in our ability to manage and deal with the situation is important and I do think confidence is better than it was a few months ago.’

But the bigger danger was jeopardising economic recovery by stopping fiscal support too early, Darling said.

‘It’s better to take back that support too late rather than too soon.’

‘Borrowing to support people now and to invest in the future may feel counter-intuitive… but in the longer run, it will mean the bills we face as a country are lower, and that we are better placed to pay them off.’

The government borrowing is forecast to hit £175 billion pounds this year, more than 12% of gross domestic product.

Darling also rejected the idea that banks should be split into those that handled retail business and those that were investment banks, along the lines of the United States’ 1933 Glass-Steagall Act.

In a speech on Tuesday, Bank of England Governor Mervyn King suggested banks could be split up into safer utility-type operations and sections that operated in riskier markets, with tougher regulation and public backing for only the former.

But Darling said the credit crunch had shown both retail banks such as Northern Rock and investment banks like Lehman Brothers could fail, and neither be left safely to collapse.

‘I don’t think you can decide that in one type of banking you’ll intervene and in one type you can’t,’ he told Reuters. ‘I don’t think a Glass-Steagall approach, which might have been right for the 1930s, is right for the 21st century.’

Instead, he defended his proposal for ‘living wills’ setting out how banks could be wound down in the event of bankruptcy, saying they would also aid regulators in identifying the riskiest parts of a bank’s business.

Darling also reiterated earlier calls for more competition in the British retail banking market, and said that the government would try to ensure this when it sold its large stakes in Royal Bank of Scotland and Lloyds.

He also singled out U.S. investment bank Goldman Sachs for criticism about the scale of bonuses paid, which look on track to be back to 2007 levels.

‘Some do, some manifestly don’t [get it]. What happened with Goldman Sachs last week sends the wrong signals.’

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