What does the latest forecast mean for Osborne’s budget?
Following David Cameron and George Osborne's failure to extend Sunday trading laws, more bad news has arrived in the form of the ICAEW's economic forecast which could spell trouble for Osborne's Budget proposal next week.
ICAEW's forecast has UK companies investing less this year due to declining business confidence, volatile global financial markets and a fall in capital spending growth.
Business confidence is low because of growing uncertainty about UK's membership in the EU as well as recent market volatilty. The uncertainty created by these events are projected to shortcut investment growth from 6.4 per cent to 5.2 per cent while the economy slows. The Monetary Policy Committee is also expected to stay put until wage growth strengthens.
The forecast calls attention to pay growth which appears to have plateaued. But the arrival of the National Living Wage will offer support for low income workers. Recent success in US and European markets as well as recent depreciation of the pound are both expected to benefit exporters despite concerns surround China and emerging markets.
This lack of confidence in the market adds risk for Osborne as he attempts to implement his 2016 budgetary plans. Original plans for pension reform have have been scrapped due to some existing fear that they may cause a savings run. But the chancellor is expected to shift his focus to pursuing measures to raise capital gains tax and target salary sacrifice schemes.
However, despite expectations for employment growth to slow there is strong job creation in the labour market, and the unemployment rate is forecast to fall 5.0 per cent in 2016. Falling oil prices mean inflation expectations remain optimistic and low interest rates are forecasted to encourage lending growth in some sectors.
In the end, Michael Izza, ICAEW chief executive, says the ecomonic outlooks of businesses will ultimately "undermine" the chancellor's efforts to produce plans that create a 2020 surplus, a problem he says the government should be more aware of.
“George Osborne will be forced to adjust his borrowing targets, cut spending further or raise taxes to fix the nation’s finances," Izza said. "It is evidently becoming a three-Parliament problem. The Government is not paying enough attention to the surge of government liabilities which has happened over the last five years. They should have a comprehensive view of the UK’s financial accounts and employ modern financial management taking the global economy into account.”