Bill Jamieson: Echoes of Black Wednesday in Osborne’s move

Norman Lamont leaves the Treasury on 16 September, 1992. Picture: Neil Munns/PA
Norman Lamont leaves the Treasury on 16 September, 1992. Picture: Neil Munns/PA
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Of all the humiliations that have rained down on the UK Government and its ministers in the past ten days, arguably the greatest is the official abandonment of its targets to balance the budget and curb the growth in debt.

These formed a central pillar of the Conservative appeal to voters ahead of the general election last year, and were reaffirmed, both in the Autumn Statement and in the Budget three months ago.

Now these have been kicked away, leaving the government – if such it can be called – with no coherent strategy or plan to manage the UK’s finances.

Instead of a reaffirmation of budget discipline, “we must”, the Chancellor declared on Friday, “be realistic about achieving a surplus by the end of this decade”.

The day before, the Conservative leadership front-runner, Theresa May, declared that “we should no longer seek to return a Budget surplus by the end of the current Parliament”, and she ruled out tax increases before 2020.

All this comes barely two weeks after George Osborne warned of a “punishment budget” of £30 billion of tax increases and spending cuts that would in his view be necessary were the UK to vote Leave in the EU referendum.

Not since Normal Lamont was forced to abandon the UK’s membership of the European Exchange Rate Mechanism on 16 September, 1992 – “Black Wednesday” in popular mythology – has a UK finance minister had the ground cut so dramatically from under him.

So is this the end of “austerity”? Beware of rushing to this judgment. The need for constraints on UK government borrowing and debt may seem to be less of an imperative for now. But they will not disappear for long. The UK’s credibility in the eyes of international investors still critically depends on keeping the country’s twin trade and budget deficits under firm control.

There were already clear signs of global investor shock with the pound falling to 30-year lows and the UK losing its last AAA credit rating.

For now, many will take comfort in this volte face in a period of dramatic political convulsion. It is a response to deep uncertainties that have befallen the economy in the wake of the Leave vote and concern about our future trade relationships with the EU.

Cuts to economic forecasts have rained down in the past week. Prospects for employment growth look bleak, with the Institute of Directors’ survey showing that a quarter currently plan to freeze hiring.

Concern that business confidence and investment will weaken substantially lay behind the signals from Bank of England governor Mark Carney last week of a further cut in interest rates this summer.

IHS chief economist Howard Archer has cut his GDP growth forecast for this year from two per cent to 1.5 per cent, with growth of just 0.2 per cent predicted for next year, and a modest recovery to 1.3 per cent growth in 2018.

Here in Scotland, the marked downturn in North Sea oil investment and activity continues to take its toll. Inverness-based Tony Mackay, in a bumper 180-page report released last week, expects GDP growth in Scotland to fall to 1.6 per cent this year from two per cent in 2015 and to recover only modestly to 1.8 per cent in 2017.

Mackay has had an outstanding forecasting record over the past five years. His report shows substantial variations among 26 industry sectors, ranging from growth of five per cent for the oil and gas industry for the 2016-18 period as it forms a base after the 2013-15 nose-dive, to a fall of 2.4 per cent for the whisky industry.

Meanwhile, given the clear possibility of a UK-wide recession, business will certainly feel that the combination of looser monetary policy and the lifting of constraints (for now) on UK spending and borrowing should help to counter a sharp downturn in investment and calm consumer nerves about a rise in borrowing costs.

And there is opportunity amid the gloom. The fall in the pound should work to help UK exports by lowering the price of UK goods and services in overseas markets. For tourism and hospitality-related businesses the fall in the pound against the US dollar should result in a rise in the number of US visitors, who also tend to spend more during their visits here. Banks have also been pledged additional liquidity, which should help avoid a pulling of overdraft facilities and a rush of receiverships and liquidations.

That said, it was clear even before the referendum vote that the economy was slowing as global concerns continue to dampen confidence. The latest survey evidence from the Federation of Small Businesses (FSB) shows that for the second quarter in a row, Scottish business owners expecting trading conditions to deteriorate outnumbered those who believe they will improve. It says Scottish government ministers may need to deploy extra advice and help for firms grappling with the consequences of Brexit. The FSB proposes a new specialist unit to give advice to businesses and monitor feedback. If this were to pick up on widespread problems – with, for example, business credit or staff recruitment – the unit could propose solutions to ministers.

The more permanent ramifications of the Brexit vote will not emerge for some time. But confidence is stymied for now by the ongoing political tumult at Westminster and in particular the absence of a coherent plan for the economy and the public finances.

That will almost certainly have to await the emergence of a new prime minister – and, of course, a new chancellor, the credibility of Mr Osborne having been dealt crushing blows. For the record, he leaves behind a budget deficit of £76bn and Public Sector Net Debt of £1.59 trillion or 86 per cent of GDP.