Brexit: The three key questions George Osborne dodged today

Will there be a punishment Budget? Can we expect a recession? How long will he be Chancellor?

Ben Chu
Economics Editor
Monday 27 June 2016 10:09
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The Chancellor broke cover for the first time since last Thursday's seismic referendum vote this morning and sought to reassure financial markets about the strength of the UK economy. But his statement left some major questions unanswered.

Will there really be a “punishment” budget?

One of the most controversial moments in the referendum campaign came on 15 June when George Osborne said a Brexit vote would wreak such instant damage on the economy that tax receipts would fall and the Government would need to impose an additional £30bn of tax rises and spending cuts in order to keep on target to wipe out of the budget deficit.

Osborne breaks his silence

At that time he raised the possibility of increase in inheritance taxes, income taxes and cuts to the National Health Service. Pro-Leave members of the Chancellor’s own party angrily said they would vote down any such “punishment” Budget. And many economists said this would be economic lunacy (and self-defeating in its own terms) since such austerity would simply make any downturn worse and make it even harder to bring down the deficit.

Today Osborne insisted he does not “resile” from anything he said in the campaign. But his line on further austerity was much softer and more ambiguous.

“It is already evident that as a result of Thursday’s decision, some firms are continuing to pause their decisions to invest, or to hire people. As I said before the referendum, this will have an impact on the economy and the public finances – and there will need to be action to address that” he said.

The timing of any corrective action on the public finances was also pushed out until the autumn. Mr Osborne added: “It is sensible that decisions on what that action should consist of should wait for the OBR [Office for Budget Responsibility] to assess the economy in the autumn, and for the new prime minister to be in place. But no one should doubt our resolve to maintain the fiscal stability we have delivered for this country.”

The truth is that the question of whether to impose more austerity to make up for any fiscal slippage will be taken by the next prime minister, whoever that is. And the next prime minister will appoint the chancellor. Will that be Mr Osborne?

Can we still expect a recession and falling house prices?

The economic modelling done by the Treasury suggested that there was a chance of a (mild) recession resulting from a Brexit vote. It also suggested a possible hit to house price growth. This was heavily spun by Mr Osborne during the campaign as a definite recession and a definite fall in home prices. Mr Osborne did not repeat those forecasts today. His language was much milder. “It will not be plain sailing in the days ahead” he said. “It is inevitable, after Thursday’s vote, that Britain’s economy is going to have to adjust to the new situation we find ourselves in.” The problem is that even if Mr Osborne believes those shocks are on the way there is a danger that for the chancellor to talk them up now would undermine consumer confidence and actually help bring them about.

Will you seek to stay on as chancellor?

Mr Osborne would not be drawn on his own future saying only “there will be questions about the future of the Conservative Party, and I will address my role within that in the coming days”. The chancellor, having gone to ground over the weekend, is reportedly weighing his options. A run for the leadership from him is now widely thought to be extremely unlikely given his unpopularity with Conservative MPs and activists. But he has built up a substantial network of patronage among ministers over the past six years and if he guided his camp’s support behind another candidate – such as Boris Johnson or Theresa May – he would expect to be rewarded with a major job after October. Yet it would probably be too much of a stretch to imagine him being allowed to stay at the Treasury, given how vociferously he campaigned against Brexit and warned of its economic consequences. Some have floated the idea of Mr Osborne being made Foreign Secretary – although his many enemies in the party could be expected to object strongly to that too.

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