A Budget for the future?

A post-election Budget …

Normally the post-election Budget is a triumphant affair, providing the opportunity for the new Government to turn its manifesto promises into an economic and financial plan. This is not the case with the upcoming event. As the EY ITEM Club Budget Preview notes, “the Chancellor is in an unenviable position heading into the Budget.” It is certainly true that Philip Hammond has to find a way to deal with a number of complex economic and political challenges.

… with a slowing economy …

As the EY ITEM Club’s Autumn Forecast made clear, the UK economy is slowing as the squeeze on consumer incomes intensifies and low confidence inhibits growth in business spending. While there has been some improvement in public finances in the year to date, the Office for Budget Responsibility (OBR) has signalled changes in its views on the UK’s productivity potential that are likely to make the situation worse.

Mr Hammond appears reluctant to abandon his fiscal targets and has indicated that he will pursue a “measured and balanced” approach to reducing public borrowing. Given the major uncertainties facing the economy centred on Brexit, the Chancellor is reportedly concerned that investor confidence in the UK could be seriously damaged if he abandons the fiscal framework adopted only a year ago. However, the Budget comes hot on the heels of the first increase in UK interest rates for over 10 years, with the Bank of England (BoE) signalling serious concerns about the future strength of the UK economy. If the Chancellor maintains his fiscal stance, the UK economy will be facing both monetary and fiscal tightening at the same time as growth slows — a potentially unappetising cocktail.

… and a tough political backdrop …

The slow-moving Brexit negotiations are clouding the outlook but the Government is also wrestling with a range of policy challenges. The general election highlighted the Conservative Party’s relatively weak appeal to younger voters, and also suggested a fall in the public’s support for austerity, with public sector pay capturing the headlines. The Prime Minister has signalled a willingness to pursue a more interventionist approach but finding the resources to address public sector pay, housing, and health and social care – while also preparing for Brexit – will be very difficult.

It therefore looks most likely that the Budget will be relatively low-key and largely reliant on low-cost measures. The Chancellor may also look to support economic activity by relaxing regulations, such as housebuilding restrictions. Mr Hammond has indicated that his priorities will be on lifting productivity, boosting the housing market, helping consumers and supporting high-growth firms which are short of finance.

… means it is time to focus on the future ...

As the EY ITEM Club Special report on business investment demonstrated, the UK has the lowest share of business investment relative to GDP among the G7. In my view, the UK is not investing enough. The UK does have a different economic structure to our peers which may explain some of the shortfall but with the need to prepare for Brexit, to adjust to technological change and to allocate sufficient resources to pursue export opportunities in a growing global market, the UK needs to invest more to avoid being left behind.

… with a Budget for investment.

Slowing demand and an uncertain outlook are making businesses reluctant to invest and the Chancellor should therefore use the Budget to create a framework that will encourage them to look beyond the short-term challenges to make long-term investments. This requires a bold Budget that seeks to:

• Accelerate the development of productivity-enhancing infrastructure in transport and telecommunications with a focus on the regions outside of London where the need and potential benefit are greatest.
• Commit more resources to developing skills to enable businesses to invest, confident that they will have access to the skills necessary to exploit their investments.
• Develop an incentive structure that encourages the reshoring of manufacturing rather than discourages it, as is the case with the current fiscal regime.
• Develop a framework of incentives to increase corporate investment in R&D.

As far as possible the aim should be to encourage public and private sector collaboration, increasing the available resources and helping de-risk business decisions, critical in a time of high uncertainty.

Read the EY ITEM Club Budget Preview

@MarkGregoryEY

EY ITEM Club is part of our Economics for Business programme which provides knowledge, analysis and insight to help businesses understand the economic environments in which they operate.