There was never going to be a 'punishment' budget – but things will get worse before they get better

Despite what the former Labour Chancellor Alistair Darling said yesterday, this is not 2008 – the solvency of the banks is not in question

George Osborne broke his silence following the EU referendum (REUTERS)

Despite what George Osborne said in the referendum campaign, there was never going to be a “punishment” austerity budget after a Leave vote in the European Union referendum vote.

And the Chancellor more or less admitted as much at the Treasury, when he broke cover for the first time since the political earthquake that has split open British public life.

It was welcome to see the Chancellor capitulate to economic logic. Another austerity budget at this juncture would do even more damage to the economy than his infamous 2010 fiscal package.

But, otherwise, Mr Osborne’s attempts to calm the markets and talk up the economy were like water splashing off a duck’s posterior. Sterling has carried on sinking, hitting fresh 31-year-lows against the dollar. Gilt yields are below 1 per cent for the first time in history as investors liquidate shares and plough the funds into safe haven government bonds (yes, despite Brexit, UK state debt is still considered a safe asset – another reason for politicians not to obsess about the size of the deficit). The value of UK-listed firms – particularly the ones that sell predominantly domestically – took another brutal beating.

This isn’t quite panic. Despite what the former Labour Chancellor Alistair Darling said yesterday this is not 2008. The solvency of the banks is not in question.

But this does amount to a major and unfolding re-rating of the prospects for the UK economy by traders and investors. And the fact markets took little notice of Mr Osborne’s re-appearance yesterday points to the central problem.

There is a political leadership vacuum. Mr Osborne is not in charge and everyone knows it. Asset values – and sterling - are likely to continue trending downward until people have some clarity of the nature of the crucial trade agreement that the UK will establish with the rest of the European Union. But only the next prime minister can clarify this and she, or he, will not be in place until September at the earliest.

The future is terribly clouded. But we can be confident of one thing: this is going to get worse before it gets better.