The Prime Minister, David Cameron, announced on Friday 24 June he would be stepping down as prime minister by October, and he or his successor will need to decide when to invoke Article 50 which sets in motion the formal legal process of withdrawing from the European Union and gives the UK a period of two years to negotiate its withdrawal.Adjustment in the UK economy
On Monday 27 June, the Chancellor of the Exchequer, George Osborne, said that the UK is ready to face the future ‘from a position of strength’ and indicated there will be no immediate emergency Budget. He also said there would still need to be an ‘adjustment’ in the UK economy.
Process of leaving the EU
However, Mr Osborne said it was ‘perfectly sensible to wait for a new prime minister’ before taking any such action. He also said that only the UK could begin the process of leaving the EU by triggering Article 50 of the Lisbon Treaty.
EU treaties and laws European Union law will still remain
in the UK until it ceases being a member, and the UK will continue to abide by EU treaties but not take part in any decision-making as it negotiates a withdrawal agreement and the terms
of its relationship with the now 27-nation bloc.
Buffer for the economy
The value of sterling on Monday 28 June fell to a 31-year low as the effects of Brexit unfolded. Sterling dropped past $1.32 to $1.3192, its lowest since mid-1985, taking losses to 11.8% since the 23 June vote.
Given all the uncertainty, investors are pricing in a rate cut this year, with some analysts expecting the Bank of England to consider quantitative easing to provide a buffer for the economy. Within days of the Brexit result, gilt yields hit record lows with the 10-year benchmark dropping below 1%.
Many analysts expect the value of the pound to fall significantly in the medium term. A weaker pound means that buying goods or services from other countries will become more expensive, inflation will therefore be higher and goods being sold to other countries will become cheaper for the buyers.
Point of maximum impact
The economic effects of leaving the EU could cause unemployment to rise in the UK which would reduce the pressure for wage growth. The Treasury estimated that wages will be between 2.8% and 4% lower at the point of maximum impact.
However, if the UK remains a member of the EU for at least another two years, much will depend on economic performance during this period.
In the event that economic growth is slower outside the EU in the short term, the Government’s income could fall, leaving it with less money to spend. There have been estimates of the size of that possible shortfall varying between £28bn and £44bn by 2019/20.
Since the welfare budget amounts to approximately 28% of all government spending, there could also be cuts that reduce tax credits and benefit payments.
Ultimately, the UK’s economic growth and potential budget shortfalls will very much depend on the precise nature of trade agreements and whether the UK will be a member of the European Economic Area (EEA).
One further option the Government may consider is not to keep its earlier target to balance the books by 2020, known as the ‘fiscal mandate’. This would enable decisions to be made as whether to maintain benefit payments at current levels.