Osborne’s legacy: What the austerity chancellor leaves behind

George Osborne, the U.K. chancellor who oversaw six years of austerity and spending cuts in the U.K., was unceremoniously replaced as the U.K.'s new Prime Minister Theresa May announced a cabinet reshuffle soon after becoming leader on Wednesday.

Former foreign secretary Philip Hammond takes over. Like May, he has been roundly and is known for his cool demeanor.

UK Chancellor of the Exchequer George Osborne speaks at a Conservative Party Conference.
Paul Ellis I AFP | Getty Images

There had been some speculation that Osborne could take up the role of foreign secretary but that position went to former London Mayor Boris Johnson, leaving Osborne out in the cold.

Osborne tweeted his congratulations to the new prime minister and chancellor and wished them luck, adding that he hoped his successor had not inherited an economy in crisis.


'There is no money left'

Osborne was first appointed to the role of chancellor in 2010 when the economic crisis was in full swing and, infamously, the then chief secretary to the Treasury David Laws remarked that his Labour predecessor had left a note in the Treasury on departing office that read, "I'm afraid there is no money."

Soon after the coalition government between the Conservatives and Liberal Democrats came to power in May 2010, Osborne quickly made tackling the government's budget deficit and national debt his priority with a mixture of tax rises (to VAT and capital gains tax) and spending cuts. The latter were to feature much more prominently, however, with 77 percent of the total consolidation to be achieved through spending reductions and 23 percent through tax increases, Osborne said.

Announcing an emergency budget in June 2010, a normal procedure when a new government is elected, Osborne spoke of the "emergency" the economy faced. He said he was not going to "hide hard choices from the British people" – setting the stage for six years of austerity measures in a bid to "balance the books."

"The coalition government has inherited from their predecessors the largest budget deficit of any economy in Europe, with the single exception of Ireland. One pound in every four we spend is being borrowed. What we have not inherited from our predecessors is a credible plan to reduce their record deficit-this at the very moment when fear about the sustainability of sovereign debt is the greatest risk to the recovery of European economies," he said.

"Our policy is to raise from the ruins of an economy built on debt. A new, balanced economy, where we save, invest and export; an economy where the state does not take almost half of all our national income, crowding out private endeavor," Osborne said.

No global systemic risk from Brexit: Investor
No global systemic risk from Brexit: Investor

Number crunching

Looking across to the continent in 2010, the euro zone was also in crisis mode. Osborne said that the single currency area was a stark reminder to the U.K. that unless it dealt with its debts there would be no growth.

"A credible plan to cut our budget deficit goes hand in hand with a steady and sustained economic recovery, with low inflation and falling unemployment. What is more, the forecast shows a gradual rebalancing of the economy, with business investment and exports playing a greater role and government spending and debt-fuelled consumption a smaller role," Osborne noted.

Needless to say, his announcements of widespread spending cuts were not universally welcomed, especially by those dependent on the U.K.'s welfare state.

Child benefit was frozen, housing benefit reduced and the income level for family tax credits was changed among other amendments aimed at saving $11 billion pounds by 2014/2015. Public sector workers were also up in arms when told they faced a two-year pay freeze. Osborne tried to stimulate business activity by cutting corporation tax, however.

With such measures, Osborne predicted back in 2010 that the U.K. would "balance the books" by 2016 and by 2013, buoyed by a better performance by the U.K. economy, Osborne committed himself to achieving a budget surplus by 2020 – a target he abandoned earlier this month after the Brexit vote.

Despite warnings over too much austerity from the likes of the International Monetary Fund (IMF), the U.K. was able to point to its robust economic growth and record low unemployment in recent years as proof that austerity had not damaged the economy.

Many people in the U.K. felt that their employment situation had become more precarious, with the rise of zero-hours contracts and self-employment becoming more prevalent. Economists also expressed concerns over the U.K.'s consumption-based growth and lackluster exports. There was also growing discontent that Osborne's fixation of achieving a budget surplus with more extensive cuts and tax rises could be tantamount to a pyrrhic victory for the U.K. economy in the long run, harming long-term investment.

Brexit is not that big of a deal: Economist
Brexit is not that big of a deal: Economist

For the record

Looking at the state of public finances now, while U.K. growth has admittedly been robust and unemployment has at record low, Osborne leaves a mixed legacy. Deficit and debt data show the government struggling to rein in its spending and borrowing.

Even ahead of the Brexit vote, the Office for Budget Responsibility (OBR) – an independent body that examines the U.K.'s public finances -- said in its fiscal and economic outlook in March that it expected the budget deficit to be £72.2 billion in 2015 and that Osborne was likely to miss his 2020 surplus target.

In its latest data from May, the OBR noted that government borrowing was £9.7 billion in May, £400 million lower than the same month last year but also £400 million above market expectations, amid a rise in government spending.

At the end of May 2016, public sector net debt was $1.6 trillion, equivalent to 83.7 percent of GDP and a £49.6 billion increase compared with May 2015, the Office for National Statistics (ONS) said. Remember that back in 2010, Osborne had predicted debt to peak at 70 percent of GDP in 2013/2014. Aside from his prediction of balancing the books by 2016, he also predicted borrowing to reach £20 billion by 2015-16.

Jasper Lawler, market analyst at CMC Markets, said in a note Thursday that Osborne's departure showed that Prime Minister May was "looking to make a fresh start on the U.K. economy" after a divisive period borne from Osborne's austerity politics.

New Chancellor Philip Hammond arrives at Downing Street on July 13, 2016 in London, England.
Carl Court/Getty Images

"Mr Osborne's theme of austerity stabilized the U.K. economy after the crisis but a recovery that has seen the divide between rich and poor increase jars against the new Prime Minister's vision of making the economy work for everyone," Lawler noted.

"Theresa May abandoning Osborne's controversial plan to balance the budget by 2020 is sensible given the unlikelihood of achieving it but leaves the country vulnerable in the next downturn."

Incoming Chancellor Philip Hammond praised his predecessor on Thursday as he announced that stabilizing the economy after the shock of the Brexit vote was his priority. He said he didn't anticipate the need for an emergency budget but signaled a move away from austerity.

"George Osborne did a fantastic job of taking this economy from the disastrous position we were in in 2010…We are immeasurably stronger today than we were six years ago," Hammond told broadcaster Sky News.

"(But) we'll need to reshape our approach to fit it for the new circumstances we are facing," he said.

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