The Ernst & Young ITEM Club’s Spring forecast is more positive about the UK Budget than many other commentators were in the immediate aftermath of the Chancellor’s statement.
The report argues that the much heralded rebalancing of the UK economy has been put on hold until the world, and especially the European, economy returns to more robust health. Therefore the Budget’s consumer centric policies, in areas such as housing support and increases in personal tax allowances, appear to be sensible changes in policy.
According to the report, the UK will return to growth in 2013 led by consumer spending of 1.2%.But no significant increase in exports and business investment will be seen until 2014 at the earliest. ITEM’s view can be summarised as: “Unbalanced growth is better than no growth”.
A mixed message to business is a missed opportunity
However, while the Budget offered consumers a boost, with incentives ranging from cheaper beer to mortgage support, for business however there are few immediate benefits on offer. And, with infrastructure spending pushed back to 2015, there’s only the promise of jam tomorrow.
As our upcoming Capital Confidence Barometer will show when released next week, UK business is experiencing a crisis of confidence of unprecedented severity and the Chancellor has failed to recognise the scale of the challenge of creating momentum in the corporate juggernaut. He needed to use the Budget to change the prevailing corporate mindset but, while growth of any kind is welcome, by sending mixed messages to business and failing to provide any incentives to encourage risk taking, the Budget may well have made things worse in several key areas.
- Firstly, by changing tack so dramatically and abandoning, or at least postponing, re-balancing, the Chancellor has created new uncertainty in the minds of corporates: future policy direction is now more confused than it was before the Budget. Business had bought in to the ‘rebalancing strategy’ but now Government is sending mixed messages. At a time of low confidence, adding further policy uncertainty will undoubtedly heighten corporate nervousness and make positive action even less likely.
- While it is true that export markets are difficult, it is also becoming more likely – as our Spring Rapid Growth Markets Forecast will explore in detail this week – that many economies outside of Europe are returning to healthy growth. Now is the time to accelerate attempts to break into these markets, rather than to sit and wait. The UK has started to have some success in diversifying its exports away from Europe and the Budget presented the Chancellor with an opportunity to support these efforts more enthusiastically rather than turn the focus back to the domestic market.
- Prior to the Budget, the Ernst & Young ITEM Club, along with other commentators, called for an increase in Government borrowing to be used to fund infrastructure investment as a way to get the economy moving faster than its current pace. By delaying infrastructure investment until 2015, the Chancellor has missed a real opportunity to accelerate economic growth, enhance Britain’s competitiveness and to provide the basis for improved business confidence. A consumer and property led strategy is too narrow to rebuild the broad base of confidence among corporates that is required to create the basis for a strong and sustainable recovery.
- Finally, the Budget offered nothing to incentivise corporates to start spending their accumulated cash mountains – equivalent to around 46% of GDP according to the Ernst & Young ITEM Club. The Government will use its Balance Sheet to support the housing market but a bolder move would have been to deploy its financial power to stimulate business investment.
Back to the Drawing Board
The Chancellor has provided a clear stimulus to the housing market. But the overall impression is one of “back to the future” back to relying on the consumer and the housing market and no real attempt to drive the structural reforms in the public and private sectors that will create the basis for future prosperity in an increasingly competitive global economy.