Everyone knows the dismal time the UK economy is in for over the coming year – but let’s recap.
Living standards are scheduled to fall at the steepest rate in 66 years as a result of wages failing to keep pace with an average annual inflation rate of over seven per cent, according to the Office for Budget Responsibility (OBR).
In response to this squeeze, households will cut spending, resulting in growth this year coming in lower than first thought.
Some 2.2 percentage points lower at 3.8 per cent, to be exact.
“It’s tough times for households and businesses,” Rain Newton-Smith, chief economist at Britain’s top business group, the Confederation of British Industry (CBI), told City A.M.
“Growth prospects are not as optimistic as what we were looking at in October.”
Chancellor Rishi Sunak’s critics say he has not gone far enough in extending support to households and should have used the benefits system to channel funds to the poorest households instead of an energy bill loan and a council tax rebate.
But, Newton-Smith has more “moonshot” ideas to strengthen the economy’s resilience to protect households and businesses from future crises.
The “only way out of [the current crisis] is to have that focus on growth and productivity to fund our public services to drive higher living standards,” Newton-Smith stressed.
Shaping policy to tap into the drivers of economic growth is a more proactive strategy that could cushion the UK from the spillover effects of shocks in the global economy, such as the ones now emanating from Russia’s invasion of Ukraine.
A core factor weighing down the UK’s poor levels of productivity growth since the financial crisis has been weak business investment.
Britain’s present tax regime is among the most competitive in the the Organisation for Economic Cooperation and Development (OECD), strengthened by the super deduction, an allowance that lets firms net 130 per cent of the value of certain investments off their tax bills.
This will all change, though. Next year, corporation tax will rise to 25 per cent. Employers’ national insurance contributions are already 1.25 percentage points higher.
And, after the super-deduction ends next year, the UK will drop from 11th to 31st in the OECD capital allowance rankings, a stat that does not bode well for future productivity growth.
The OBR estimates Britain will squeeze out an average productivity growth rate of 1.3 per cent over the next four years.
Businesses say Sunak missed a trick at the spring statement by failing to announce a successor to the super-deduction, something he needs to remedy at the next budget in October.
“What businesses want… is that long term strategy around tax and investment and the overall environment for growth,” Newton-Smith said.
Giving businesses a “permanent capital allowance, not at 130 per cent, but at 100 per cent” would allow them “to write off the full amount of that investment in year one,” she recommended.
The main barrier to companies stepping up investment is uncertainty. They need to know what the tax regime will look like in a year, five year and 10 years’ time to maximise their spending.
“Businesses feel they are being asked to step forward and invest while the Chancellor’s trying to wait and see how things develop over the summer rather than taking some of those bolder moves now,” Newton-Smith added.
A skills shortage in the UK workforce, compounded by people dropping out of the labour market since the start of the pandemic, is adding to companies’ woes.
The apprenticeship levy was designed to boost skills in the economy, but Newton-Smith thinks it has been a “failed experiment”.
The CBI recommends the policy be relaunched as a skills challenge fund that delivers both employer flexibility and high-quality training.
Strengthening the long-term competitiveness of the UK’s tax regime has been given impetus by businesses being hit by higher costs.
Consumer inflation is already seven per cent, a 30-year high, and is expected to scale higher in the coming months. Businesses’ input prices have climbed 19.2 per cent over the last year, the fastest rate on record.
While the Bank of England has started a cycle of rate hikes to tamp down on the cost of living – raising them at each of the last three meetings – Newton-Smith argues the central bank should have got going sooner.
“The Bank of England should have acted sooner in the autumn. [It] feels like they’ve been playing a game of catch up over the last few months,” she said.
Boosting productivity growth can support the Bank’s campaign against easing inflation by reducing the cost of producing goods and services, which should feed through to the consumer.
Perhaps the Chancellor should take note of the CBI’s recommendations come October.