The Chancellor finds himself in a very difficult position, not just because he is scrabbling around to create an environment in which the economy can grow, but more importantly – in my opinion – he actually has very little power to make meaningful and sustainable changes.
In the ultimate democracies (one of which we thankfully are) and with the advent of super-fast communication, both in the corporate world and, most tellingly, socially, it is virtually impossible for policy makers to make decisions based purely upon the facts. Political expediency rules!
This situation is of course exacerbated (x 10?) when you are actually the larger party in a coalition government. Who would have thought 6 years ago that in 2012 we would be 4 years in to the largest financial crisis for nearly 100 years, and that our economic and business strategy was being run by Messrs. Osborne and Cable?
The Chancellor has done his best with his limited hand and against significant opposition from both within, and without. He has put business at the heart of a last-ditch drive to rescue the economy before the next general election, with £5.4bn set aside for roads and schools, a surprise cut in corporation tax, a tenfold increase in the capital investment allowance, £1bn of additional capital for the proposed business bank and £1.5bn of support for exporters.
Underlining the problems he is dealing with, the Treasury’s independent forecaster – the Office for Budget Responsibility (OBR) – downgraded growth for every year to 2016 and ruled that the Chancellor will break his golden rule on the national debt, potentially putting the AAA sovereign credit rating at risk.
This was confirmed by Fitch on Monday night that “missing the target weakens the credibility of the UK’s fiscal framework, which is one of the factors supporting the rating”. A final decision will be taken next year.
The Chancellor also had to pencil in another £5bn of austerity measures to eliminate the structural deficit by 2018 – three years later than scheduled when the Coalition came to power in 2010. Almost £30bn of these austerity measures are now unspecified as they fall after the current Parliament!
Here are the key points for business and the economy:
Business
- The main rate of corporation tax is to be cut by 1% to 21% from April 2014
- Temporary doubling of the small business rate relief scheme to be extended by a further year to 2014
- £1bn extra capital for Business Bank
- Temporary increase in capital allowances from £25k to £250k
The Economy
Forecasts
• Office for Budget Responsibility forecasts 0.1pc contraction this year
• OBR forecasts the economy will grow 1.2pc next year, 2pc in 2014, 2.3pc in 2015, 2.7pc in 2016 and 2.8pc in 2017.
• The deficit this year has fallen by a quarter to 6.9pc this year. OBR forecasts deficit to come down to 6.1pc next year, 5.2pc in 2014, 4.2pc in 2015, 2.6pc in 2016 1.6pc in 2017
• Net debt will miss target to fall by 2015/16. It will be 74.7pc this year, then 76.8pc next year, then 79pc, 79.9pc in following years, falling to 79.2pc in 2016/17 and again to 77.3pc in 2017/18.
• OBR forecasts government on course to eliminate structural deficit in five years’ time
• Forecast for debt interest payments £33 billion lower than predicted two years ago
• Share of national income spent by the state to fall from 48pc of GDP in 2009/10 to 39.5pc in 2017/18
Employment
• 1.2m new jobs were created in private sector since election, 600,000 more than predicted
• Unemployment set to peak at 8.3pc rather than 8.7pc as previously forecast
Government Spending
• Government total managed expenditure to be £745bn
• Period of austerity extended by one year to 2017/18
• All money saved in next two years will be reinvested in £5bn capital spending
• Capital expenditure will also fund 120,000 new homes, flood defence schemes, broadband expansion including ultrafast broadband in smaller cities
• Whitehall department budgets cut by 1pc next year and 2pc in 2014, with NHS and schools exempt
Whichever way you look at it the message coming from all directions is that things aren’t going very well, and that we don’t know when this is going to change. It seems that every country’s future is dependent on every other’s. All policy moves are contingent on things getting better elsewhere.
Maybe that’s the price of globalisation? When it goes wrong – there is nowhere to go. Everyone wants to devalue and export more, but that is difficult when everyone is trying to do the same thing!
I would be very interested to hear other views on this. What do you think?
Image by:The CBI