Leading article: Higher borrowing is the least bad of all the options

The economic slowdown is already eroding UK tax receipts, and the Bank of England has projected zero growth next year. The Chancellor thus finds himself with three choices. He can raise taxes, cut public spending, or increase public borrowing. We shall have to wait for next month's pre-Budget report for confirmation, but it was evident from Alistair Darling's words yesterday that he has resigned himself to the third course of action.

This is the least bad option. To raise taxes would only exacerbate the recession. And while there is fat in public spending that should be excised, cuts that are too sharp would make the downturn more painful. And the likely increase in the benefits bill would eat up any savings made.

Yet we must not for a second underestimate the gravity of what the Government is planning. What we are witnessing is the death of Gordon Brown's "golden rule" on balancing expenditure with tax revenues over the course of the economic cycle and the busting of the "sustainable investment rule", which aimed to keep public debt below 40 per cent of GDP. It was these rules, set in 1997, that underpinned Britain's recent years of economic growth and stability. It was the professed determination of the Government to maintain fiscal discipline at all costs that helped attract foreign investment to Britain. This was one reason why the Bank of England was able to keep interest rates at comfortable levels. Now there is a serious risk that the credibility of Britain's fiscal stability framework will be undermined. The consequences could be powerful inflationary pressures in the years ahead – and higher interest rates to combat them.

There is a grim irony that Mr Darling began his speech yesterday arguing that "the true test of mettle comes when life is tough, not easy". The Government's golden rules were fine when economic conditions were "easy". Now that they are "tough", the rules are to be ditched. The Chancellor, like other ministers in recent months, sought to pin the blame on adverse global economic conditions. But this government also bears a great deal of the blame for its predicament.

According to Mr Darling, all governments will need to "live within their means" from now on. It is a pity that his predecessor, Mr Brown, did not heed that good advice in the years after 2001. If the Government had built up a fiscal surplus in the boom times, rather than turning the public spending taps on full, it would have been in a much better position now.

The Chancellor also boasted yesterday of his Government's success in "reducing national debt to one of the lowest levels of any major developed country". What he neglected to mention is that there are billions of pounds in future public liabilities hidden in Private Finance Initiatives, which are effectively off the Government's balance sheet. Whether these sums are officially counted as public debt is, in a sense, irrelevant. The market knows they are there. Let us be in no doubt: ministers have much less room for shelter from this economic storm than they should – and could – have had.

The Government has decided to put the immediate health of the British economy before its own long-term fiscal credibility – and it is hard to see what else it could have done. But there will have to be a reckoning at some point. Public debt is only ever taxation deferred. The books will have to be balanced again one day. Whether Mr Darling or Mr Brown will be in office when that particular fiscal crunch comes around, of course, is another question entirely.