George Osborne has effectively abandoned the centrepiece of his economic strategy by ditching his promise to return government finances to a surplus by 2020. Below is a piece I wrote for Progress on the U-turn the Chancellor made on Friday and what he should do now.
George Osborne is trying to clear the decks for the new Tory leader by getting the Government’s mistakes out of the way now.
Yesterday he signalled that his great mission of delivering an overall budget surplus by 2020 was to be consigned to history less than a year after he had first promised it. He failed to deliver it in the last parliament - despite it being the cornerstone of the coalition agreement - and now we know the Tories will fail again. The Tories pledged to balance the books but Cameron and Osborne leave office with the national debt at an all time high, its fiscal rules in tatters and a recession looming. It is a record of failure and all our constituents will pay the price.
George Osborne has long ignored those economists and us in the a Labour Party who said his borrowing targets were a damaging obsession, and the mounting evidence that he was unlikely to meet them anyway.
But it should be no surprise that George Osborne has now, at this moment, been forced to admit defeat. The negative impact of the vote to leave the European Union on business investment, employment and growth will - as the Bank of England, IFS and IMF warned - will of course feed through to the public finances.
Uncertainty about Britain's future relationship with our European neighbours and a very real fear that we won't be in the single market in just a couple of years time will weigh on investment and jobs now and for the years ahead. With businesses struggling to export or make a profit, and holding back on investment, recruitment and pay rises, we are bound to see falls in tax receipts as well as increased spending on unemployment or in-work benefits. Inevitably, the Treasury will have to borrow more than it planned to cover these gaps in revenue and extra expenditure, adding to the deficit and debt.
The real question is whether it is enough to simply rely on these "automatic stabilisers", paying out more in benefits as jobs and wages are cut, and borrow more as the ability of businesses and workers to contribute to tax revenues declines - or whether we should be taking more proactive fiscal measures to support and stimulate the economy alongside the monetary response that Bank of England Mark Carney has now promised.
In 2008 and 2009, at the peak of the global financial crisis the Labour government increased spending, cut taxes and allowed the Bank of England to start quantitative easing. Now with interest rates on government bonds below one percent for the first time ever there is a strong case for bringing forward public investment - on transport, energy and other infrastructure investment. Given knocks to consumer confidence, reversing the ill-conceived and regressive cuts to universal credits would also help low income families who will be most hurt by a recession. And the government should also take action to help small businesses grow and create jobs and crucially help them become global exporters - crucial if we are ever going to bring down our huge current account deficit (the difference between what we export and import) at a time when our ability to trade within Europe is going to be thrown up in the air.
These are some of the measures I argued for before the last Budget as part of a plan to build a stronger and more inclusive economy - now they are needed even more urgently to prevent a downward spiral that would hit small businesses, low paid workers and disadvantaged regions harder than anyone.
The Chancellor is right to scrap his targets - he should never have made them in the first place. We need strong public finances but government must also respond to the economic realities and that reality now is an economic slowdown and possible recession. There is no doubt in my mind that we must be ready to do whatever it takes to prevent a shock and a downturn developing into a slump that could set back all our hopes for economic and social progress for a generation.