A long, hard slog in the right direction
By Dr Gerard Lyons
This was a good budget in difficult times. Trouble is, just how difficult the times are is still not fully appreciated. The economic environment the Chancellor inherited was not good. The recent economic performance has not been good. And there is no reason to think it will get better anytime soon. Indeed the scale of fiscal tightening previously announced will probably weaken growth further in the near-term. The UK economy faces a long, hard slog.
Today’s budget provided some clarity about what type of economy the Chancellor hopes to see in the future. And there the message was well directed. One of Britain’s biggest problems has been its lack of strategic thinking. It still has some way to go on this to compete with China, Germany and many other economies. The budget outlined four areas the government wants to focus on, all of which made sense:
First, to boost competiveness. The Chancellor talked of the need for the tax system to be efficient, certain, simple and fair. One could not disagree. However, today’s budget showed it is not even certain now for banks and oil companies. Making tax more competitive is a modern day reality. The Chancellor was right to address this, particularly in terms of the cuts in corporation tax. Also, to retain the highly skilled, offering some certainty that income tax rates may fall in the future might be helpful.
The second and third ambitions the Chancellor talked about are interlinked. The second is to make the UK the best place to start a business, by boosting incentives for entrepreneurs and for research and development. In a globalised world, it is as important to stop losing business as it is to encourage new start-ups. The third is to restore manufacturing, exports and investment. This means reversing a downward trend in manufacturing. The economy that leads in this area in Europe is Germany. Moreover, we have to compete on quality, not just cost.
Uncertainty about the UK economic outlook, when domestic demand is sluggish and the infrastructure poor, hardly suggests a large rebound in investment. The UK has had a poor track record in investing, and it will be hard to change this. The UK is also not best positioned to benefit from rapidly growing emerging economies. We export more to our Ireland, than to Brazil, India, China, Russia and South Africa combined. Unlike Germany, we don’t produce the capital goods they need. And large firms may be more inclined to invest in emerging economies, not here. Moreover, if the growth in investment is to be from small and medium-sized firms then not only are the measures announced by the Chancellor good, but we need to build on them to make British firms global in their outlook.
The Chancellor’s fourth aim is to address the UK’s skills shortage. The UK needs to spend more on its appalling hard infrastructure like road and rail, and more on its soft infrastructure like skills and education. Our education system is like a fork in the road, one route leads to some of the best universities in the world, now starved of cash, the other route to the bottom end of the system where education attainment is low. A few years ago a House of Lords Committee talked about the need to invest more in apprenticeships and technical skills. Today’s budget announced steps to address this.
The growth forecast may still be too high. I stick with my forecast of 1.4% for this year. If ever one needed a sign of how squeezed peoples’ budgets are it was that the cheers in the Commons greeted the announcement of cuts in fuel duties. The fiscal arithmetic made sense. The budget was fiscally neutral. Thus the markets will like it. And the Bank of England should find no reason to change its interest rate thinking based on what the Chancellor said. The challenge is that if growth disappoints again the fiscal numbers may not improve as expected. What we know about tightening fiscal policy is that there needs to be a credible medium-term plan to reduce the deficit and that, whilst fiscal policy is being tightened, interest rates have to stay low.
Dr Gerard Lyons is Chief Economist at Standard Chartered. The opinions expressed are his own.