ICAEW: Weak business optimism is a bad sign for chancellor George Osborne

Chris Papadopoullos
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More UK businesses are saying the glass is half-empty (Source: Getty)

Business confidence has dropped to a three-year low, signalling lower growth and posing a threat to chancellor George Osborne’s budget targets.

The Institute of Chartered Accountants in England and Wales’ (ICAEW) confidence index dipped to a score of 11.4 for the start of 2016 – the lowest since early 2013.

Lower economic growth can impact government borrowing by reducing tax receipts from businesses and workers, and also raising payouts of unemployment benefits. The ICAEW said the current level of business confidence pointed to economic growth of 0.4 per cent over the first three months of 2016 – the joint-lowest since 2013.

Read more: UK economy grows 0.5 per cent in the fourth quarter

“Growth is expected to slow and will mean less income into Treasury. If that happens, the chancellor simply won’t meet his deficit reduction target,” said ICAEW boss Michael Izza.

“After a particularly bullish Autumn Statement, the Chancellor has had to row back on the immediate prospects for the UK economy. This presents new challenges for him and how he responds in next month’s Budget.”

The chancellor has a target of £73.5bn for borrowing in the 12 months ending 31 March, a figure that was recently revised upward due to a reclassification of housing associations from private sector to public sector.

Read more: George Osborne facing Budget squeeze

To meet the target, the Treasury needs to run a surplus of £5.5bn between January and March, compared with a £4bn deficit over the same period last year.

Weaker growth prospects have been reflected in financial markets’ expectation for the first Bank of England interest rate hike since rates were cut to record lows. Expectations of when the first rate hike will happen shifted from late-2016 to late-2017 over the course of January. The Bank will publish new economic projections this Thursday in its inflation report.

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