Look beyond the “caretaker” Budget, business needs to pay close attention to the future shape of fiscal policy

EY ITEM Club expect a “caretaker” Budget

With the General Election looming, the EY ITEM Club believes that a “caretaker” Budget is the most likely scenario on March 18th. Nevertheless, the Chancellor’s statement should continue some positive news. With expected Tax receipts rising and interest rates on Government debt falling – even since the Autumn Statement – EY ITEM Club expect that the Chancellor will be able to announce a reduction in the Office for Budget Responsibility’s (OBR) forecast of borrowing for the current year of just over £2 billion and a possibility of a £6 billion reduction for the following year. It is hard to imagine any Chancellor not wanting to play up these positive developments.

Budget infographic

Beyond this though, it is unlikely that there will be a significant number of major policy initiatives announced in the Budget. The Chancellor may well pull one or two rabbits out of his hat but the politics of a Coalition close to an election are likely to limit his scope for broad-based change. This Budget is more likely to mark the start of the fiscal policy debate for the next Parliament and this is what business should be focusing on understanding.

…but the medium-term is much harder to predict…

Paul Johnson of The Institute for Fiscal Studies recently commented that the gap between the fiscal plans of the two largest UK political policies is as wide as it has been since 1992. The Conservative Party has stated it wants to eliminate the entire government deficit and run a small surplus during the next Parliament. Duncan Weldon estimates this would require spending cuts or tax rises worth between 4.3% and 5.3% of GDP (national income), depending on how large a surplus was desired.

Labour, by contrast, only wants to balance the current budget (current government spending excluding capital investment). That means that, under their plans, the government would still be borrowing in the next Parliament to make investments. Labour’s plans imply spending cuts or tax rises of 3.0% according to Duncan Weldon’s analysis.

…although business seems to have a clear position…

Chris Giles of the Financial Times has surveyed the attitudes of business leaders to government spending. Support for deficit reduction before the end of the next Parliament was very strong with 39% wanting this achieved wholly through spending cuts rather than tax rises.

In terms of where the cuts should fall, 84% of the business leaders interviewed want to see welfare spending reduced compared to only 4% who wanted an increase. A majority of 54% to 46% wanted the NHS ring fence ended and 71% wanted the ring fence on international aid removed. And 85% saw more private provision of public services as one way to help achieve these aims.

However, 90% wanted an increase in the capital spending budget of more than the planned 2% and there was a majority of more than 2 to 1 in favour of maintaining the protection of the school’s budget.

…but may need to be careful what it wishes for…

The position of corporate leaders on public spending seems clear: overall they would like less except in selected areas, which presumably have a clear benefit to business. However the position may be more complicated than they realise: the benefits to business may flow in ways that are not obvious from the headline numbers.

Kevin Farnsworth of the University of York has calculated that “socio-corproate welfare” and “corporate welfare” as he describes them, could have delivered something of the order of £85 billion of taxpayers’ money in benefits to the corporate sector in 2012. This estimate includes wage support, training assistance and pensions in the first category and subsidised lending, export insurance, marketing by the Department for Business Innovation & Skills and other departments and public purchases from the private sector amongst the second. The approach used is a very specific one and may not be accepted by all business leaders as valid, but it does show the challenges of understanding how fiscal policy changes may impact the economy.

For example, there is research available to support the view that public sector funding of Research & Development can have major benefits for the private sector. Grants and other support may also be important to certain companies. Businesses need to be clear on the specifics of policy if they are to be in a position to make informed decisions.

Even the potential impact of welfare spending is not that straightforward to analyse. Something of the order of 47% of benefits accrue to pensioners. Cutting this could well reduce consumer spending and disproportionately impact businesses exposed to this segment. If this spending is protected then policy might mean schemes that benefit lower income workers are targeted. This could have significant implications for labour intensive sectors such as the hospitality industry.

…and now is the time to do the numbers.

Government finances are a complex are. When listening to politicians, it’s easy to believe the choices are straightforward. The reality is different especially when policy differs between the parties to the extent it currently does. Business must get to grips with the detail and plan accordingly.

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