Don’t be scared, time for Budget fireworks

No good date for a Budget …

Scheduling the Budget for 29 October was always going to create opportunities for commentators to talk about the scary nature of the challenges facing the Chancellor. However, it also seemed possible that the Chancellor could base his speech on a clear view of the terms of the UK’s exit from the European Union. The situation has not developed as hoped and there is still a great deal of uncertainty around the terms of the UK’s exit from the EU.

As the EY ITEM Club note in their Budget Preview, the Chancellor could hardly face a more uncertain backdrop heading into the Budget. Facing one of the most volatile and unpredictable global, political and economic backdrops for many years would be a challenge even without having to prepare the Budget without knowing whether the UK and EU will be able to enact a Brexit transition withdrawal arrangement in late March 2019, or what form the UK’s relationship with the EU will take after the transition period (if it is enacted) ends.

But there is more. The Chancellor will also have to develop his response to the statement by Prime Minister Theresa May that austerity is over in her speech at the Conservative Party conference in early October. All of these factors have to be considered before attention can turn to policy for issues such as the impact of Universal Credit, the challenges facing the UK high street, social care resources and the housing market.

… with few pennies for the Guy …

As the EY ITEM Club’s Autumn Forecast made clear, the UK economy is slowing as the boost from trade weakens, the squeeze on consumer incomes has continued and low confidence has seen investment fall. While there has been some solid improvement in public finances in the year to date, these are unlikely to be sufficient to provide the Chancellor with the ammunition he needs to address the wide range of issues on his agenda.

Despite Theresa May’s pledge to end austerity, EY ITEM Club suggest “it looks highly probable Philip Hammond will hold off from any major commitment to loosen the purse strings (apart from the measures already announced on the NHS) until after Brexit occurs in late March 2019”. And with the economic backdrop looking unhelpful, the Chancellor looks unlikely to be aided by significantly lower projections for the public finances over the medium term. As there is also no way to justify any ‘Brexit dividend’ in this Budget, the only way the Chancellor could effectively deliver an end to austerity would be for him to relax his fiscal rules, which he appears reluctant to do.

The Chancellor has indicated that there will be a need for tax increases to pay for the extra NHS spending that has already been announced. Any other spending increases that the Chancellor announces will also need to be funded, if fiscal slippage is to be avoided. All of this suggests that businesses looking for a forward-looking, ambitious Budget will be disappointed — there may be some fiscal initiatives but it seems unlikely that any major measures to reposition the UK economy for life after Brexit will be forthcoming.

… but we desperately need some fireworks and illumination …

In my view, a cautious Budget would be a mistake. As we noted before last year’s Budget, the EY ITEM Club special report on investment demonstrated that the UK has the lowest share of business investment relative to GDP among the G7. With investment falling this year just as businesses in the US, Germany and elsewhere increase their investment, the UK is not investing enough. The country needs to look to the future and to begin to prepare in earnest for life after Brexit, embracing technological change and allocating sufficient resources to drive the reshaping of the economy that is required if we are to survive and prosper in a different economic paradigm to the one that has existed over the last four or five decades.

Businesses are looking for a coherent strategy around the UK’s economic policy after Brexit. My conversations suggest very clearly that some businesses are not enthused by the industrial strategy and are confused by the tendency to tinker in areas such as electricity pricing, transport and subsidies for electric cars. There is a lack of any overall theme for businesses to work from.

… so it is time to light the blue touchpaper.

The uncertain global outlook, the lack of clarity on Brexit and a slowing economy have made businesses reluctant to invest just at the time the UK needs more expenditure on productive assets. The Chancellor should use the Budget to start the process of articulating a vision for the future shape of the UK economy, to provide a framework that will encourage businesses to look beyond the short-term challenges to make long-term investments.

This requires a bold Budget that:

• Sets out a coherent, integrated vision for how policy will be developed to shape the economy post-Brexit, with a focus on critical areas such as healthcare, climate change and support for trading businesses
• Prioritises incentivising business investment through capital allowances, more support for R&D and a clear description of how public sector capital projects will be deployed to support this
• Commits to boosting the industrial strategy, expanding it to services and linking any initiatives to a renewed push on devolution
• Announces a new focus on the high street and the UK’s towns as part of the drive to accelerate devolution of economic decision-making. This should include an in-depth analysis of business rates with a remit to consider the appropriate means of revenue raising at local levels consistent with the demands of the modern digital economy
• Allocates more resources to developing skills to enable businesses to invest, confident that they will have access to the skills necessary to exploit their investments

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 at a time of high uncertainty.

Read the latest Budget preview here: www.ey.com/budgetpreview