Osborne Follows Carney in Signaling Stimulus After Brexitby
Chancellor says government must be ‘realistic’ on budget goal
Gove, May signal they wouldn’t aim for surplus by 2020
The leaders of the U.K. economy united to signal they will soon deliver stimulus to protect it from the fallout of last week’s shock decision to quit the European Union.
Chancellor of the Exchequer George Osborne on Friday suggested he is no longer seeking a budget surplus by 2020, a day after Governor Mark Carney indicated the Bank of England may soon cut interest rates.
“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,” Osborne said in Manchester. “This is precisely the flexibility that our rules provide for.”
The policy makers are looking to support an economy that is bound for a recession if almost three quarters of economists surveyed by Bloomberg News are correct. Carney yesterday said the economic outlook had “deteriorated” after the vote for a so-called Brexit.
Speaking in London as he launched his bid to become prime minister, Justice Secretary Michael Gove said Osborne was “absolutely right to insist on flexibility.” Rival candidate Home Secretary Theresa May said on Thursday that she would “no longer seek” to meet the goal.
This would be the third fiscal pledge the government has breached, having already failed to deliver on targets on debt and welfare. It previously made a legally binding commitment to turn a budget deficit of 4 percent of economic output last year into a surplus of 0.5 percent by 2020.
The rule technically only applies in “normal times,” meaning it can be abandoned if growth is projected to drop below 1 percent. The Office for Budget Responsibility, which draws up estimates for the government, is due to update its forecasts later this year.
“This is a welcome step at a time of economic uncertainty,” said Martin Beck, senior economic adviser to the Ernst & Young ITEM Club. “This could help to counter any hit to confidence and expectations following the EU referendum result.”
The Labour opposition welcomed the move, with shadow finance spokesman John McDonnell saying the chancellor should now seek to put forward a plan of government investment and support for businesses.
"Osborne’s recovery built on sand was underpinned by a fiscal rule that is not robust or flexible enough to equip our economy for any potential shocks it may face," he said in a speech in central London on Friday. "Working families need to be reassured and a plan put in place."
This week’s developments also suggest Britain’s 1.6 trillion-pound ($2.1 trillion) debt pile may no longer keep falling as a share of output, as had been promised. Net debt currently stands at about 84 percent of gross domestic product. The 10-year U.K. government bond yield, which fell to a record-low 0.776 percent on Friday, was at 0.855 percent as of 1:30 p.m. London time.
Labour has repeatedly called on Osborne to ease the pace of austerity, which has been the hallmark of his chancellorship since it began in 2010. Back then, the deficit was more that 10 percent of GDP, the highest in British peacetime, following the global financial crisis.
For Osborne, it represents a shift from the tone he struck as recently as Monday, when he repeated warnings that additional spending cuts and tax increases would be needed to fill a budget hole caused by leaving the EU. The Institute for Fiscal Studies estimates the cost to the public finances could be as high as 40 billion pounds.
Britain saw its credit ratings cut this week and Prime Minister David Cameron, who will step down by early September, said on Wednesday that he didn’t “think it would be right to suspend the fiscal rules.”
Economists at Bloomberg Intelligence still say the economy can avoid a recession even as they say it will “slow markedly.” They predict the Bank of England will halve its benchmark to 0.25 percent in August.