George Osborne has ditched his cherished plan to run an absolute budget surplus by 2019-20, as the storm clouds hanging over the British economy in the wake of the last week’s fateful referendum result closed in further.
The 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 the Chancellor yesterday to jettison the deficit reduction goal, which he had made his personal totem.
The reversal puts greater pressure on the five candidates in the Conservative leadership race, the winner of which will have the job of negotiating Britain's exit from the EU.
Yesterday, Andrea Leadsom emerged as the main pro-Brexit rival to Home Secretary Theresa May, following Justice Secretary Michael Gove's first speech since he dramatically announced his candidacy, at the expense of former Vote Leave ally Boris Johnson.
Ms May continues to command the majority of support from Tory MPs, with almost 100 now backing her bid to replace David Cameron as Prime Minister. However, Ms Leadsom said the next party leader should be someone who supported the Leave campaign ahead of the referendum. Ms May campaigned to remain in the EU.
Ms May said that she would not stick to Mr Osborne's controversial target, which was widely criticised by economists even before the referendum result for being economically incoherent and potentially damaging.
Speaking at the Greater Manchester Chamber of Commerce, the Chancellor said:"As the governor of the Bank of England said yesterday, 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."
"That's exactly what our fiscal rules are designed for”.
In his March Budget Mr Osborne set out plans to run an absolute budget surplus of £10.4bn in 2019-20 as part of his updated fiscal mandate. To reach this he had enacted further sizeable cuts to public service spending and a host of stealth tax rises.
The fiscal mandate allowed the budget surplus target to be suspended if the UK's year on year growth rate, as forecast by the Office for Budget Responsibility (OBR), fell below 1 per cent. The OBR is scheduled to deliver its next round of forecasts in October - and is widely expected to slash its forecasts in line with most other economic organisations.
The Chancellor's words suggest that he expects the OBR's downgraded forecast to trigger the suspension of the rule.
A large number of economists had criticised the design of the Chancellor's fiscal mandate, which requires the Government to run an absolute budget surplus in 2019-20 and every year thereafter, because it did not carve out an allowance for state capital infrastructure spending, which enhances the economy's long-term productivity.
They argued that there was no economic justification for absolute budget surpluses (as opposed to surpluses on day-to-day or "current" government spending) and that the Chancellor's framework was liable to result in less capital infrastrucutre spending than the country needs.
During the referendum campaign Mr Osborne came in for ferocious criticsm from all sides 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 Chancellor 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 the Chancellor retreated from this promise, in any case, on Monday when he said that there would be no new fiscal statement until the autumn when the new Prime Minister is in place.
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