George Osborne warns of 'significant negative shock' to budget after Brexit vote
The Chancellor has abandoned his target for cleaning up the nation's finances by the end of the parliament after warning that Britain will no longer achieve a budget surplus by 2020.
George Osborne said the UK economy was bracing itself for a "significant negative shock" following the Brexit vote and the Government had to be "realistic" about reaching a surplus by the end of the decade.
Mr Osborne had pledged to deliver in line with Office For Budget Responsibility (OBR) forecasts, which predicted the UK to have a budget surplus of £10.4 billion in 2019/20 and £11 billion the year after.
Speaking at the Greater Manchester Chamber of Commerce, he said : "Now, 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.
"This is precisely the flexibility that our rules provide for. And we need to reduce uncertainty by moving as quickly as possible to a new relationship with Europe and being super competitive, open for business and free trading. That's the plan and we must set to it."
According to official figures, the Government borrowed £74.9 billion for the complete financial year ending in March 2016, meaning it overshot its annual target of £72.2 billion by £2.7 billion.
The OBR was predicting borrowing to shrink to £55.5 billion in 2016/17, £38.8 billion in 2017/18 and £21.4 billion in 2018/19.
However, public sector new borrowing excluding public sector banks hit a worse-than-expected £9.7 billion in May, despite dropping by £0.4 billion compared with the same month last year.
Meanwhile, the Chancellor is already showing signs of being blown off course this year, with borrowing in the current financial year hitting £17.9 billion, a £0.2 billion jump compared with 2015.
Paul Johnson, director of the Institute for Fiscal Studies, said the Chancellor's announcement meant more austerity spending cuts and tax rises in the next parliament.
"You can't borrow forever. So we will have a few more years of more borrowing but my guess is that this is not the end of austerity," he told BBC Radio 4's The World At One.
"This means that austerity will go on longer because we will probably have the spending cuts and tax rises right through the 2020s to pay for this.
"You are going to have to have the pain later on to repay the additional borrowing that we are going to need to do in the short run."
Home Secretary Theresa May, who has thrown her hat into the ring to become the next Conservative Party leader and prime minister, said on Thursday that she was ready to ditch Mr Osborne's target of achieving a budget surplus by the end of the Parliament if it was necessary to avoid tax rises.
Responding to the Chancellor's announcement, Conservative leadership candidate Michael Gove said: "It does seem to me to be ... sensible to think about what it is that we need to do in the light, perhaps, of OBR forecasts which are due to come, in order to make sure that we bring the deficit down but do so in an orderly way in response to events.
"Let's wait and see what the OBR says, but I think the Chancellor is absolutely right to insist on flexibility."
Shadow chancellor John McDonnell said: "I welcome the Chancellor's decision to finally listen to the calls made by myself and Jeremy Corbyn over the last nine months to drop his failed surplus target. It is only a shame he was not realistic sooner, as under Jeremy Corbyn Labour has been unequivocal in its opposition to failed Tory austerity."
Conservative Andrew Tyrie, chairman of the Treasury Committee, said: "The Chancellor was right to abandon the fiscal rule. It's the latest in a long line of fiscal rules, targets and objectives of successive governments to have bitten the dust.
"Any rule which required the Chancellor to adjust public spending or taxation twice a year to take account of small changes in the OBR's forecasts was always likely to be vulnerable. To be credible it needed to be put in a longer term framework.
"The Bank now has the crucial task of doing what it can to maintain stability - they may be at it for some time."