British finance minister George Osborne warned on Friday he would scrap the government’s promise for a budget surplus by 2020 owing to fallout from Brexit, sparking forecasts of more austerity pain.
The Conservative government of Prime Minister David Cameron who resigned last week after losing a referendum on Britain’s E.U. membership, had previously vowed to eliminate the budget deficit by the 2019/2020 financial year in a key austerity pledge. “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 told business leaders in Manchester, northern England. “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.”
Chancellor of the Exchequer Osborne had already warned Tuesday that Britain would face fresh tax rises and spending cuts in the wake of Brexit. Paul Johnson, director of the Institute for Fiscal Studies, said Osborne’s announcement meant more painful austerity 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,” Johnson told BBC Radio 4. “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.”
Echoing the Bank of England’s gloomy forecasts from the previous day, Osborne added Friday that Britain’s E.U. exit would exert a major “negative” impact on the economy. “The referendum result is as expected likely to lead to a significant negative shock for the British economy,” Osborne said. “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,” he added.
The BoE had also revealed on Thursday that it could slash interest rates soon to counter the downbeat economic outlook, which it said had “deteriorated” because of Brexit.
Governor Mark Carney also hinted that the central bank could reactivate its so-called quantitative easing scheme to pump more cash into the economy and boost lending.
Osborne stressed on Friday that the government’s contingency plans had dealt with chaotic financial markets following the Brexit vote. “We have very extensive contingency plans in place to deal with disorder in the market,” he added. “We stand ready to react to whatever developments there are in the market and we do this from a position of strength.”
Prime Minister Cameron will meanwhile step down in the autumn, leaving his successor to deal with E.U. exit negotiations and trigger the so-called Article 50 that will eventually prompt Britain’s departure from the bloc. Turning to those negotiations, Osborne added that there needed to be “compromises” if Britain wanted to secure certain aspects of the bloc, like access to the single market.
“There are going to be—as we come to the discussion over the coming months—inevitably combinations and compromises [that] we are going to have to make to work out the best future for our country.”