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Brexit: George Osborne ditches 2020 budget surplus target

Published 01/07/2016

Chancellor George Osborne says UK 'must be realistic' about balancing budget
Chancellor George Osborne says UK 'must be realistic' about balancing budget

George Osborne has ditched his cherished plan to run an absolute budget surplus by 2019-20, as the economy deals with the economic shock of last week’s Brexit vote.

The Chancellor has said the UK “must be realistic about achieving a surplus by the end of the decade”.

The economy is widely expected to slow down rapidly in the wake of last week's vote - and possibly enter another recession - which would hit tax revenues and make it impossible for the Government to hit surplus in four years time in the absence of further spending cuts or tax rises.

"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" the Chancellor said at 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."

"That's exactly what our fiscal rules are designed for”.

The bookies favourite in the Tory leadership race, Theresa May, said yesterday that she would not stick to the controversial target, which was widely criticised by economists even before the referendum result for being economically incoherent and potentially damaging.

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 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.

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.

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