George Osborne has abandoned his long-held goal of reaching a surplus in the UK’s public finances by the end of the decade.
In a speech in Manchester, the chancellor said that the government needs to be “realistic”, given the uncertainty generated by the decision to leave the EU.
“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,” he said.
Having already broken two of his self-imposed fiscal rules, Mr Osborne indicated on Friday that he would activate the get-out clause on his third and final rule.
At the Budget in March, Mr Osborne admitted he would fail to meet his promise to cut debt as a share of gross domestic product this year. Last year he rowed back on his cap on welfare spending.
The promise to run a surplus from 2019-20 and then after in all “normal” times was meant to create himself a legacy as the chancellor who balanced the UK’s books.
But even before the vote to leave the EU, there was doubt about whether Mr Osborne’s target was achievable.
After the Office for Budget Responsibility, the fiscal watchdog, judged that the economy was smaller and weaker than thought, in his last Budget Mr Osborne resorted to moving tax revenues into the 2019-20 financial year and removing as much spending as possible from it to deliver a forecast surplus.
At the time, the Institute for Fiscal Studies warned he was “running out of wriggle room”.
Paul Johnson, director of the IFS, said on Friday that in the aftermath of the vote to leave the EU the chancellor had been left with little option.
UK economy: statistics at a glance
“Under the circumstances and in a world where growth has been hit significantly, it would clearly be implausible to cut spending or raise taxes such as to meet the target.”
The chancellor’s rule allows him to abandon the target for a budget surplus if the OBR forecasts growth will drop below 1 per cent.
Most independent economic forecasters now think this will happen. But by announcing already that he will not seek to achieve his planned surplus, Mr Osborne is pre-empting the new forecasts the OBR will be preparing in the autumn.
Andrew Sentence, former member of the Bank of England’s interest-rate setting Monetary Policy Committee, said the decision was surprising.
“Both the BoE and the chancellor need to be careful about responding too quickly to political events,” he said.
“The chancellor should wait until the autumn when the OBR deliver new economic forecasts he can respond to.”