Before the EU referendum, the then-Chancellor George Osborne warned a vote for Brexit could mean a punishment Budget.
On 15 June, he told the BBC: “There would have to be increases in tax and cuts in public spending to fill the black hole.”
One month later, Osborne has been turfed out of the Treasury to make way for Philip Hammond, who quickly confirmed there would be no emergency budget.
For Leave voters, this may confirm that the financial whips and chains existed only in Osborne’s imagination.
And yet, sooner or later, the pain is coming. And Hammond will have to be ready for it.
The lashing storm
The swings of the FTSE 100 captivated commentators in the days after Britain voted for Brexit, but it is only now that the data on the underlying economy starts to trickle through.
The housing market is already squirming. According to the Royal Institute of Chartered Surveyors, new home buyer enquiries were at the lowest levels since mid 2008. The report stated: “Anecdotal evidence suggests that uncertainty relating to the EU referendum result was the primary driver of the slump.”
Meanwhile, four commercial property funds took steps to prevent investors pulling out their cash.
In theory this could be good for first-time buyers, who face prohibitive prices. But the word on the street is the main beneficiaries will be wealthy overseas property investors, who can afford to hold onto a property for years and for whom weaker sterling represents a nice discount.
The jobs market is also reeling. Mariono Mamertino, an economist at job site Indeed, said: “A further, prolonged period of doubt will do little to encourage employers who have already delayed making hiring decisions to come off the fence.”
The Bank of England’s agents found that some businesses are beginning to delay investment projects and postpone recruitment decisions.
The Bank concluded that, taken together with the creaking housing market: “These indicators suggest economic activity is likely to weaken in the nearer term.”
Although Osborne carved out a reputation as the austerity Chancellor, in practice he benefited from the Bank of England’s stimulus programmes, which pumped money into the economy and kept credit cheap.
The Bank of England was widely expected to slash the Bank Base Rate on Wednesday from its existing low of 0.5 per cent. In the event, it didn’t. But monetary policy is one of the first lines of defence.
Low interest rates would make it easier for Hammond to keep the economy moving by investing in infrastructure. Crucially, new PM Theresa May has shredded Osborne’s fiscal rule, which constrained borrowing to invest in this way.
Mitul Patel, head of interest rates at Henderson Global Investors, said: “Lower interest rates will lower borrowing costs for the Government. It will make borrowing for infrastructure cheaper.”
As well as using interest rates, Patel predicts the Bank is likely to return to other financial crisis-era measures, such as Funding for Lending – a scheme offering banks discounts to lend – and quantitative easing.
But he warned: “The scope for further cuts is fairly limited.”
The painful road ahead
Although it might not have felt this way to single parents, or others reliant on public services, a classic Osborne tactic was postponement. He missed key deficit reduction targets in his last Budget – causing the Institute for Fiscal Studies to predict he would need an extra year of austerity.
Brexit has simply added more pressure. In May, the IFS predicted quitting the EU would add two extra years of austerity.
Patel said: “Austerity has to be on the agenda at some point. They still need to think about five to ten years down the line. How do we get things on a sustainable footing?”
In her first speech as PM, Theresa May pledged to help those who are “just managing”. Her comments appeared to be addressed at working-class Leave voters, who are widely believed to have used their votes to protest against austerity.
Hammond could shift the burden of cuts from the working poor to wealthy pensioners, or he could raise taxes. But both of these decisions will hurt the Tories’ grey-haired army of supporters. It is precisely why Osborne, a fine Budget tactician, continuously froze working-age benefits while allowing pensions to rise.
Osborne may be gone, but the financial situation will still come knocking at No. 11. Sooner or later, Hammond is going to have to inflict some pain.