Brown to legislate on fresh code for fiscal stability

The Chancellor of the Exchequer plans to enshrine his tough approach to government spending in the law. In his `pre-Budget' statement later this month, Gordon Brown will announce plans to legislate on a new code for stability in the government's finances, reports Diane Coyle, Economics Editor.

Proposals for a "fiscal stability code" will be one of the highlights of the pre-Budget consultative statement, or "green Budget", on 25 November. Mr Brown will extend his commitment to openness in economic policy to legislation on how tax and spending plans should be set.

The Chancellor sees this as the logical extension of increased openness in monetary policy, where the requirement for the Bank of England to meet an inflation target and account for its success or failure is in the course of being incorporated in the law.

In future, governments will be required to publish clear rules for public sector borrowing, provide full information on the public finances at least once a year, and account for their success or failure in meeting their borrowing targets. The proposed legislation would also enshrine an annual pre-Budget consultation exercise.

The plan is likely to please the financial markets, which have already broadly welcomed the new framework for setting interest rate policy. Mr Brown's reputation for austerity is reasonably well-established, but the City would regard self-imposed restrictions on government borrowing as an improvement.

It would put Britain in the vanguard in terms of the openness of setting government finances, as only New Zealand and Australia have similar legally binding restrictions on tax and spending policy.

Elsewhere, the "pre-Budget" is expected to confirm the Government's existing commitment to limit its borrowing to no more than its investment spending - the "golden rule" - and to keep the ratio of debt to national output stable.

It will, however, update the forecast for the public finances, which will look more favourable than at the time of the July Budget thanks to the strength of the economy. Most forecasters now expect the Public Sector Borrowing Requirement for this financial year to turn out lower than the Government's pounds 11bn target.

The document to be published by the Chancellor in 10 days' time will include, in addition, an analysis of the jobs market and the modernisation of the welfare state; a chapter on Britain's competitiveness; an assessment of fairness and tax, which will include progress reports of a few of the special reviews; and an updated economic forecast.

It will not cover public spending, as the commitment to hold to the planning total set by the Conservative government still stands. The comprehensive review of public spending will be completed by next summer, for the subsequent Budget.

A main document will be accompanied by background papers, and other announcements will follow the Chancellor's Commons statement.

Although the Treasury is trying to stop calling it the "Green Budget" - because this misled people into thinking it was about environmental measures only - the document will be a shade of green, in contrast to the red hue of the actual Budget report.