In the wake of the UK’s vote to leave the European Union, Chancellor George Osborne has announced that he will now be abandoning his aim of restoring government finances to a surplus by 2020.
Having campaigned with David Cameron to try to persuade British citizens to vote to remain in the EU, Osborne now says he now must be more realistic with his policy targets in the face of a potentially severe hit to the economy.
Osborne said, in a speech on Friday: “As the governor of the Bank of England said yesterday, the referendum is expected to produce a significant negative economic shock to our economy.
“How we respond will determine the impact on people’s jobs and on economic growth, the Bank of England can support demand.”
He said, in relation to his flagship target of eradicating the government’ fiscal deficit by 2020, that while he intends to do all he can to work towards it, now it is unlikely to be achieved.
“The government must provide fiscal credibility,” he said, “continuing to be tough on the deficit while being realistic about achieving a surplus by the end of the decade.”
When the target was first set, it came with a caveat that allowed for it to be scrapped in exceptional circumstances, triggered if the Office for Budget Responsibility downgraded its UK economic growth forecast to below 1%. Osborne’s latest comments, as well as the general opinion of most economists and the recent downgrading of the UK’s credit rating, seem to imply that this is incredibly likely.
Osborne’s comments came shortly after the Bank of England’s governor, Mark Carney, warned that since the vote, “the economic outlook [for the UK] has deteriorated and some monetary policy easing will likely be required over the summer”.
Mitul Patel at Henderson Global Investors, said that he expects a drop in interest rates to be among the easing instruments that Carney will be employing, even hinting at the possibility of negative interest for a time.
Patel said: ““The market now expects interest rates to fall to close to 0%, and while Carney has previously stated a dislike of negative interest rates, nothing can be taken off the table.”
Brexit’s long term effect on the British economy is very much uncertain at the moment, not least because Article 50, which kicks off the two-year exit procedures, has not yet been triggered, and so negotiations about exit terms have not yet begun.
No one knows quite what the UK will look like financially post-Brexit, but in the immediate aftermath of the referendum, the impending uncertainty already seemed to be taking its toll. Osborne himself described “clear signs” of economic upset in the days following the vote.
Immediately after the results of the vote were revealed, the FTSE 100 plummeted, as did the more UK-focused FTSE 250, and the pound fell to a 35 year low against the dollar.
Since then, the FTSE 100 has regained its lost ground, but the FTSE 250 still sits fairly far below its pre-Brexit vote level, despite some recovery. Much of the recovery has come from gold and silver mining companies, while UK house builders and developers continue to perform poorly.
The pound started pushing back up against the dollar, moving from lows of $1.31 up to $1.354, but has since dropped back down to $1.33.
Osborne’s surplus target had been criticised even back when it was initially set, not only for being potentially unrealistic, but also for the potentially damaging nature of the requisite austerity policies.
After Osborne revealed that he would be abandoning his target, shadow chancellor John McDonnell quickly responded by saying: “Sadly the vote last Thursday for Brexit has only brought forward what was inevitable.
“The Chancellor had already dropped his other fiscal rules on welfare and debt at the Budget in March, and according to many economists he was expected to be forced to drop this one too.”
Home secretary Theresa May, who has thrown her hat in as a potential successor to David Cameron, had said that she already intended to scrap Osborne’s surplus target, should she get into power.
After Boris Johnson’s surprise exit from the Prime Ministerial race, May will be up against pro-Brexit candidates Michael Gove, Liam Fox and Andrea Leadsom, as well as pensions secretary Stephen Crabb, who, like May, supported the campaign to remain.