George Osborne has in effect abandoned the lynchpin of his economic strategy – to return the government finances to a surplus by 2020 – following the Brexit vote.
The chancellor, who campaigned to remain in the EU, said there were already “clear signs” of shock in the economy a week after the referendum result wrongfooted the market, sending the pound to more than 30-year lows and costing the UK its last AAA credit rating.
His admission that he would have to push back his key goal for getting the public finances back in the black was seized upon by Labour as evidence of “failed Tory austerity”.
Speaking a day after the governor of the Bank of England, Mark Carney, hinted at an imminent interest rate cut to shore up the economy, Osborne spelled out the government’s role in keeping money flowing following the EU referendum result.
Addressing the Greater Manchester Chambers of Commerce, Osborne said: “The referendum result is as expected likely to lead to a significant negative shock for the British economy. How we respond will determine the impact on people’s jobs and on economic growth. The Bank of England can support demand.
“The government must provide fiscal credibility, so we will continue to be tough on the deficit, but we must be realistic about achieving a surplus by the end of this decade. This is precisely the flexibility that our rules provide for.”
That marked a turnaround from the chancellor’s pre-referendum warning on the campaign trail that a vote for Brexit would force him to call an emergency budget, with increases in income tax, alcohol and petrol duties, and cuts to the NHS, schools and defence.
After the vote to leave the EU, against the backdrop of weakening business and consumer confidence, and volatile financial markets, Osborne ruled out an emergency budget.
The chancellor’s latest announcement was not entirely unexpected, given that his fiscal rules allow for more wriggle room in exceptional times. The intervention was welcomed by business groups as a small piece of certainty at a time of political crisis in the UK.
Carney addressed that spike in economic and political uncertainty head on this week when he warned that the economy was suffering from “economic post-traumatic stress disorder”. The Bank’s governor prompted a stock market rally after indicating that cuts to interest rates, which are already at a historic low of 0.5%, were on the cards.
Achieving a budget surplus by the end of the decade and every year thereafter “in normal times” was one of Osborne’s most coveted economic goals. It had conjured images of Mr Micawber, a character in Charles Dickens’s David Copperfield. Governments were expected to at least balance the books in the 19th century and in the first three decades of the 20th century, when the public finances were run on the Mr Micawber principle that income exceeding spending equalled happiness, and spending exceeding income equalled misery.
Osborne’s admission that he needed to be “realistic” about achieving it follows a warning in March that he had only a 50-50 chance of achieving his aim of a £10bn surplus in four years’ time.
The warning came from the Institute for Fiscal Studies following the budget, in which Osborne was already facing a deterioration in growth forecasts. Slower growth makes it harder to improve the public finances because tax receipts wane.
The shadow chancellor, John McDonnell, said there had been “no credible economists that could be found to support the chancellor’s surplus target in the first place”.
“It is only a shame he was not realistic sooner, as under Jeremy Corbyn, Labour has been unequivocal in its opposition to failed Tory austerity,” said McDonnell. “The truth is [that] as Labour consistently warned, George Osborne’s recovery built on sand was underpinned by a fiscal rule that is not robust or flexible enough to equip our economy for any potential shocks it may face, or to provide the investment that our economy so clearly needs.”
Andrew Tyrie MP, the chairman of the Treasury committee, described the abandoned fiscal rule as “the latest in a long line of fiscal rules, targets and objectives of successive governments to have bitten the dust”.
Manufacturers’ organisation the EEF welcomed the “much-needed pick-me-up” and called for the government to combat any economic downturn by committing to infrastructure expenditure.
Rain Newton-Smith, the chief economist at the CBI business lobby group, said the chancellor was right to adapt his budget policy to the state of the economy, but that it should still keep a long-term goal for a surplus.
“Once the economy has adjusted, the government should set out plans to return the public finances to balance over the economic cycle,” Newton-Smith said.
The Resolution Foundation thinktank called for a rethink of the £12bn cuts to working-age welfare scheduled to take place during this parliament.
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