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Does Osborne’s sacking mean austerity is dead?

Terry portrait with tieAn interesting alignment of events meant the Bank of England met to decide whether or not to change gear for the first time in seven years on the same day as the new Chancellor started his job.

Despite speculation to the contrary, the Bank decided to leave interest rates alone, probably to let the dust settle on the political upheaval triggered by the Brexit vote.

This, in hindsight, may be wise, given that there is little we know for sure about the impact of the vote. Even less is known about the economic policies of the new Prime Minister Theresa May who has never held a government position on such matters.

Even so, she has indicated in two speeches already this week that she is seeking a more egalitarian distribution of wealth. Her declared intention to help those who are ‘just managing’ may well prove to be the test of her tenure in Number 10.

If this provides an early clue as to the direction of travel then it also points to a possible easing, if not an end, to the policy of austerity pursued by George Osborne. His sacking from Number 11 indicates either a dislike for this strategy, or of his bravado style of presentation. It may be a combination of both.

However, the austerity campaign was also stoked by his successor Philip Hammond who believed in cutting the deficit and shrinking the public sector. Like Mr Osborne he was also an EU Remainer and, also like Mr Osborne, he warned of the damaging impact of Britain leaving.

It will therefore be interesting to discover what Mrs May sees in Mr Hammond that she did not believe Mr Osborne could deliver.

The Bank of England’s decision to hold interest rates at 0.5% came in spite of Governor Mark Carney effectively preparing the markets for action.

Ironically, the decision may be seen s a sign that things ain’t as bad as Mr Carney warned on the day after the Brexit vote. He has since denied talking the economy down.

It has given everyone some breathing space, not least the battered pound. While a weakening of sterling would have been a great help to exporters, the MPC probably decided it had fallen enough already.

Of course, this is may be just a pause before the next cut which could come at the next meeting in just three weeks time.

Mr Hammond’s task is made more complicated by the overlaying of the Brexit negotiations and the implications for the British economy which he must now build, potentially outside the single market.

Along with Mrs May and David Davis, who is installed in the newly-created role of Brexit Secretary, Mr Hammond must devise a plan for a new economic relationship with the EU that could take a number of forms.

There is talk of Britain adopting the Norway model – outside the EU but part of the single market – though this would require accepting key conditions, including the free movement of labour. As the immigration issue was a key reason for the public voting to pull out of the EU this is going to be the most awkward of squares to circle.

David MundellScotland and Northern Ireland are also snapping at the heels the new UK government, demanding a deal that somehow keeps them in the EU, or at least retains access to the single market. This view has brought a sympathetic response from, among others, the Scottish Secretary David Mundell (right) and Labour’s Lord Falconer.

However, the vote was not a ‘regional’ one, whatever First Minister Nicola Sturgeon may argue. If Scotland deserves a special deal in the EU then so do those regions of England, including London, which also voted to remain. Using this argument the north of England would never have accepted a Tory government in Westminster. On the other hand, the vote highlights a growing divide in Britain, and disenfranchising swathes of the country is a weak argument for defending the status quo.

Ms Sturgeon’s ‘special case’, however, may be deemed less relevant if the UK government negotiates a deal for access to the single market for the whole of the UK.

More immediate concerns will focus on the flattening of economic activity. A survey from the Scottish Chambers of Commerce and the University of Strathclyde’s Fraser of Allander Institute prior to the referendum shows performance is “muted”.

Neil Amner, chairman of the Chambers’ Economic Advisory Group, says the survey points to “signs of weaknesses in investment and difficulties in recruiting skilled workers over the past three months and these are illustrative of concerns which may persist after the Brexit vote.”

Mr Amner offers little useful advice beyond stating the obvious that “the Scottish and UK Governments must utilise all available powers to make businesses more competitive”. He does, however, note the self-inflicted wounds which are not making things any easier for business.

Some sectors such as retail and tourism have been flagging up increases in costs, coinciding with the introduction of the National Living Wage in April this year. For larger businesses, the prospect of tax rises through the introduction of the new Apprenticeship Levy is another cost burden.

Compared with the bigger challenges in Mr Hammond’s in-tray, easing these pressures on business is something that could be achieved with relative speed and would enable the new Chancellor to put a few points on the scoreboard early in his new role.

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