Comprehensive Spending Review: no sign of an economic transformation


Where is the growth coming from?

The UK economy is growing slowly, driven primarily by strengthening consumer activity. But this type of growth is not without risk. The latest mortgage lending figures illustrate the risk of the property market overheating, while the global economic situation remains uncertain, as shown by the volatility of equity markets in the USA and China.

Against this backdrop, many UK businesess were looking for the Chancellor to use the Comprehensive Spending Review to set out a plan for growth, and transform Government spending to support the economy’s recovery. The UK Government’s spending in recent years has been driven by “austerity” rather than “growth” and so changing course would require much more than a few tweaks. What is needed is a fundamental change in approach to put growth first and to align both spending and cuts against the requirements for growth.

This is the normal way a business would approach its planning and budgeting but does not seem to be the approach used to develop today’s announcement.  The result appears to be a disjointed effort that is more tactical than strategic.  There is a question mark over whether the CSR will have done enough to increase confidence and provide the boost that will lead businesses to increase their rate of investment, infrastructure spending is promised but not this year.  The Social Market Foundation has highlighted the potential shortfall of over £30 Billion  in the NHS budget in future that may come back to haunt the Chancellor.

What was missing from the CSR?

We are living in new economic environment. Business confidence has collapsed and companies are hoarding record levels of cash and increasing dividends and share buy backs, but refusing to commit to normal trend levels of investment. The economy has been flat for so long that risk aversion has become embedded in behaviour and historic relationships have broken down:  achieving economic growth will require much more effort than at similar points in previous recessions.

The UK has a need for urgent investment in transport and housing amongst other areas. In its pre-Budget Report, the Ernst & young ITEM Club called for Government to borrow £10 Billion in each of the next 2 years to invest in infrastructure. This was expected to add 0.5% to GDP in each year and pay for itself in the form of lower borrowing within 3 years. Although, the CSR promises increased infrastructure investment in 2015-16 there was no suggestion of any desire to bring infrastructure spending forward. The positive messages on capital investment for transport were also offset by a reduction in future current spending.

Housing remains a major issue for the UK economy. There is a clear need for new house building but neither the initiatives in the Budget to support house purchases or the CSR announcements today will have any major impact on the rate of new house building.  The long term transformation of the UK economy requires a more stable housing market but this is clearly not a policy priority.

So what would have been on my wish list? Overall, business wants joined up policy which begins with clear objectives and priorities for transforming the economy, which is then followed through. However, I was personally disappointed not to see the following areas addressed in today’s statement:

  • Science spending was protected but if the UK wants to improve its competitive position, more R&D is arguably needed. Government has to play a role here.
  •  If the UK aspires to rebalance the  economy and grow its manufacturing base then we need to   do more to encourage apprenticeships and bridge the widening skills gap.
  • As our UK Attractiveness Survey highlighted, the UK regions are losing the battle for inward investment.  Regional development requires more resources but there was no significant change in this area.
  • The UKs export performance remains disappointing but the budgets for both the Foreign Office  and Business, Innovation & Skills were reduced – although there was a promise of a greater contribution from both departments. The reality is the UK is under resourced in both areas and just working harder will not necessarily change the country’s   trade position.
  • We are promised major announcements on Energy policy but as of yet few details have been released.


 Steady as she goes

The CSR has done little to change the UK’s dependence on the consumer and the housing market to drive economic growth. Until there is a sustained 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, it seems likely that UK growth will continue to grow at a slow and steady pace.


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