A Budget for low growth

I wanted a Budget for growth…

As I noted in my pre-Budget blog, it is hard to see how the appropriate UK policy response to a slowing in external demand and increased risk is to reduce domestic spending. Seven years on from the financial crisis, with little sign of success from deploying the “long-term economic plan” it seemed reasonable to suggest that the Budget was the time to consider an alternative course of action for the UK economy.

…but we got a Budget for low growth…

What we got was a Budget for a world of lower growth than we previously expected. As the EY ITEM Club concluded:

“The Budget was framed by the OBR’s more pessimistic view of future productivity growth. This means that the level of GDP is 1.5ppt lower by the end of 2020 than had been forecast in November. This downward revision to the productivity assumption is a judgement call and, it must be said, a pretty bold one given how big the stakes are. We have always been of the view that the OBR errs on the side of pessimism when it comes to the supply-side and this revision takes them further in this direction.”

It seems somewhat contradictory to claim on one hand to be following a “long-term economic plan” and then, on the other, to deliver a Budget with a huge range of initiatives. The “Tinkerman” Chancellor intervened in education, introduced a sugar tax and delivered a significant rebalancing of business taxation, favouring small businesses at the expense of larger businesses.

In addition, another £3.5bn is taken off departmental spending in 2019-20 and public service pension contributions are set to increase due to a cut in the discount rate used to calculate payments. In addition, the Chancellor has brought forward capital spending from 2019-20, flattering borrowing in his target year for a budget surplus

…and little to encourage greater corporate risk-taking. .. 

Neither the revised growth forecasts nor the policy proposals offer much for businesses looking for signs of growth. The OBR downgraded its growth forecasts for every year of the forecast, most significantly from 2.4% to 2% for 2016. Yes there were the now traditional promises on devolution and infrastructure, changes to the tax system, a further cut in corporation tax and increases in tax free allowances for income and savings.

But delivery remains the challenge. Based on the OBR’s forecast, there’s little sign that any of these initiatives will have a material impact on either GDP or productivity. After more than six years in Number 11, it does appear that the Chancellor may have been able to shore up the economy but appears to be struggling to generate an increase in the rate of GDP growth.

…in a risky world.

When we view the lower growth forecasts against the backdrop of the Chancellor’s warnings of both a cocktail of global risks and a potential negative impact of Brexit, there was little to encourage businesses to invest either more or faster. With external demand slowing, businesses could be forgiven for looking for some additional activity to stimulate growth.

Back to the drawing board.

The UK economic outlook is challenging and uncertain. Growth is going to be lower than the historic trend rate and risks are weighted to the downside. Business cannot rely on the macro-economy driving growth, in a world where even inflation remains subdued. The focus has to be on:

  • Identifying the segments and sectors which offer the prospect of faster relative growth and allocating resources to these, devolution for example may create new geographic opportunities;
  • Continuing to manage cost carefully and considering how technology may be leveraged to drive greater efficiency;
  • Looking to M&A as a route to drive synergy, consolidate competitors and acquire new skills and capabilities to disrupt markets;
  • Considering international markets for potentially faster rates of growth than the UK market.

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