Wednesday 28 June 2017

Osborne abandons plans for surplus as UK recession looms

Chancellor George Osborne. Photo by Christopher Furlong/Getty Images
Chancellor George Osborne. Photo by Christopher Furlong/Getty Images

Ben Chu

George Osborne buried his cherished plan to run an absolute budget surplus by 2020 yesterday, as the storm clouds hanging over the British economy in the wake of the last week's fateful referendum result closed in further.

In an ominous sign for Ireland, the British economy is widely expected to slow down rapidly in the wake of last week's vote for Brexit, and possibly slide into another recession, something that would undermine tax revenues and make it impossible for the government to balance the books in four years' time in the absence of further spending cuts or tax rises. This prompted Mr Osborne to jettison the deficit reduction goal, which he had made his personal totem.

Read more: UK consumers drew down record debts  in month before poll

"The referendum result is as expected likely to lead to a significant negative shock for the British economy," the chancellor said in a speech to the Greater Manchester Chamber of Commerce.

"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".

The chancellor's climb-down came as signs grew that businesses are forestalling investment and shifting some operations out of the UK, just as was warned by the Remain camp in the referendum campaign. Easyjet said it is looking into relocating its headquarters out of Luton in order to diminish the risk the budget airline might not be able, in future, to operate flights across the Continent. That followed a similar announcement earlier in the week from Vodafone.

A new poll by the Institute of Directors suggests one in five firms are now considering moving some of their operations outside Britain. Official figures this week showed that business investment has been falling for the past two quarters and this is strongly expected to worsen still further given the uncertainty created by the referendum vote.

The chancellor's move on the surplus came as little surprise. The bookies' favourite for the Tory leadership race, Theresa May, had already announced earlier this week she would not stick to the controversial surplus target if elected. And the Office for Budget Responsibility had already said in March there was a significant chance it would not be hit.

Read more: Markets stage Brexit bounce, but analysts warn of further slumps

During the referendum campaign Mr Osborne came in for ferocious criticism for arguing that a Leave vote would be followed by an instant austerity budget to repair the economic damage. Economists said such additional austerity would merely deepen any downturn, hitting tax revenues further and thus proving counterproductive in terms of repairing the public finances.

Pro-Leave politicians said the Mr Osborne was attempting to scare the public into casting a Remain vote, and 57 Conservative MPs said they would vote down any such "punishment budget" if enacted. But Mr Osborne retreated from this promise, in any case, on Monday when he said that there would be no new fiscal statement until the autumn.

Meanwhile, the head of the EU's executive vented frustration yesterday at calls for deep reforms to reinvent the EU after Brexit, saying there were no proposals on what exact changes were needed to safeguard European integration.

The comments by Jean-Claude Juncker, head of the European Commission, highlight the vulnerable spot the EU has found itself in after the shock British vote.

"Everyone is saying 'We need more reforms'. Nobody is saying what kind of reforms we would need in addition to those which are under way, including some initiatives we have taken in the field of the social dimension of the internal market."

Irish Independent

Promoted articles

Also in Business