Earlier this week, before the polls opened, the Treasury published the government borrowing figures for May along with an updated estimate for 2015/16 borrowing. Such was the focus on Referendum debate, the numbers garnered little attention. However, as consideration turns to the Brexit world, the Treasury’s data is a useful starting point to answering the ‘What next?’ question:

• The revised borrowing number for 2015/16 was £74.9bn, £2.7bn higher than the March 2016 Budget projection from the Office for Budget Responsibility (OBR), but £16.7bn below 2014/15 outcome. In the grand scheme of things, £2.7bn is a small difference, but one in the wrong direction.
• The OBR’s projection for 2016/17 borrowing is £55.5bn, which it now turns out is £19.4bn below last year’s figure rather than £16.7bn less.
• After two months of 2016/17, borrowing has totalled £17.9bn, £0.2bn up on the same period last year. To be on track, the number should have been £13.1bn.
• The maths means that to hit target, borrowing in the next ten months must be £19.6bn lower than 2015/16, ie about £2bn a month less, on average.

Thus even before yesterday’s vote, the Treasury data suggested that Mr Osborne was not going to hit his 2016/17 borrowing target, regardless of the outcome of the Referendum. He was facing a difficult Autumn Statement, in part due to cooling UK economic conditions brought about by government-induced Brexit uncertainty.

Now that the vote has come down in favour of Leave, there is a new large dose of uncertainty to deal with and, unlike the Referendum, this one has no clear end date. Mr Osborne’s continued role as Chancellor is part of that uncertainty. The Leave camp want to oust Mr Osborne because of his support for Remain and the Treasury’s assorted and curiously precise warnings about the economic consequences of Brexit. His dire Budget warning of 15 June produced 57 Conservative MPs saying that they would vote against it to mean the threatened increased tax and reduced spending measures would only pass if Labour supported them – an unlikely scenario to put it mildly.

Add to that the fact that the short term recessionary economic outlook suggests any fiscal move should be towards stimulation rather than tightening and realistically the chances of an austerity Budget in the short term is probably close to zero.

The Treasury – whoever is at its head – will want to see how markets settle before deciding on next steps. Interestingly, the Office for Budget Responsibility will be publishing its annual Fiscal Sustainability Report on 12 July. This will have to now reflect the Brexit consequences, a scenario ignored in earlier OBR (and Bank of England) projections.

In the near term, action is more likely from the Bank of England, which will want to calm markets – the FTSE 100 opened down 500 points, with bank shares off 25%. If anything, the resignation of Mr Cameron has added to the Bank’s responsibility for managing the short term reactions.

COMMENT

We are all likely to be confronted by some worried clients in the coming days, weeks and months. The lesson of the past is that making any changes at times of extreme volatility is dangerous, if not foolhardy. There could well be an element of bungee jumping in the precipitous falls we have seen overnight. Yes, the world had changed, but how is far from clear at this stage.

To reiterate this point we have produced a blog on what we are advising clients to do.