Builders everywhere… except in the GDP numbers.
After today’s Autumn Statement, no-one can be in any doubt about why the Chancellor of the Exchequer is so regularly seen in hard hat and overalls, as he told Parliament repeatedly today he is a builder. But by 2020, we will have had 10 years of building and it seems somewhat disappointing that UK GDP growth in that year will be around 2.3% according to the OBR, in line with our long-term trend rate of growth. Ten years of work and no change in our fundamental economic potential.
As the lack of acceleration in GDP suggests, the Autumn Statement offers the prospect of jam tomorrow but there is little sign of an immediate boost. In 2002, annual GDP growth is the lowest of the 5 year forecast period, business investment is expected to grow at 4.5%, below the average for investment in the economy as a whole, with Government investment at 9% driving the economy. The £1 Trillion of exports by 2002, seems completely unachievable with trade having negative growth of 0.1% in 2020, little different to the other 4 years in the forecast period.
The short-term outlook for business looks very challenging. The already announced National Living Wage will squeeze certain sectors of the economy such as Retail, Hospitality and Support Services hard. The new Apprenticeship Levy is likely to have an impact on total pay of a similar amount but again disproportionately hitting relatively large employers. With no news on the proposed reform to Business Rates, and the new granting of power to elected mayors to raise rates to fund local infrastructure, there is the risk of a real squeeze on corporates.
The Budget of the Department for Business, Innovation and Skills will be cut by 17%, which is less than some predictions, but this good news will be tempered by the conversion of certain grants and awards to loans. Funding of scientific research remains in place and there was additional support for manufacturing but on a small scale. Overall there was little to excite businesses in the short-term.
…for long-term gain?
The two main elements of the Chancellor’s longer-term strategy that offer businesses the hope of longer-term growth are the proposed investment in infrastructure and the support for regional growth deals. Both do however appear to require a reasonably long time to have an impact.
We are planning to build and build…
There was over £100 Billion of Infrastructure spending announced with £50 Billion on Rail and £13 Billion on Roads the two key transport programmes. As EY research presented in our 2015 UK Attractiveness Report set out, road is the priority area for businesses and so these plans should be well received. Rail is a lower priority for business and so the largest element of the infrastructure programme may be less well-regarded.
If infrastructure is to boost the economy, the Government will have to show it can deliver. Performance in recent years has been weak in terms of delivery and well publicised shortages in construction workers may create further challenges, especially alongside the ambitious house building programme announced today. A 37% cut in the budget of the Department of Transport seems to be at odds with the need for resources to develop and co-ordinate a programme of this scale.
…and to rebalance the economy…
The Chancellor announced his “Devolution Revolution” which is made up of a range of policy initiatives. We have already highlighted the devolving of power over Business Rates, this is part of a wider reform of public finances that also includes the potential for local councils to keep the receipts of asset sales to use in driving more efficient operations locally. Further regional growth deals were approved and more are expected in an unprecedented attempt to rebalance the UK economy geographically.
The Chancellor made a great play in his speech of the fact that growth in parts of the North has been quicker than the South over the past few years. It will be interesting to see when EY launches its new UK Regions and Cities Forecast on December 9th if this trend is expected to continue. As the UK economy recovers it is possible that growth in London and the South eats may bounce back faster. Infrastructure investment and regional deals have some way to go before they drive economic output, after 2002 it would seem from the OBR’s forecast. Meanwhile, national policies on austerity and the still limited support for manufacturing will hamper the North relatively more.
…but it may take some time.
For businesses hoping for an economic growth boost to their business, today’s Autumn Statement will have been disappointing. The message is clear: in the short-term business will have to drive growth on its own with little extra boost from the public sector. There is a promise of longer-term benefit from infrastructure and devolution but this is dependent on the Government delivering. Up until 2002 the outlook is steady as she goes.