With George Osborne’s 2012 Budget around the corner, and Britain on the brink of a double dip recession, amidst the Eurozone crisis, lobbying group the CBI has called upon the chancellor to use his 21st of March budget to drive growth by unlocking the potential of corporate balance sheets and helping businesses invest.
The Office for National Statistics announced that unemployment in the UK had risen again in the fourth quarter of last year, and has reached its highest levels since 1995. The International Labour Organisation or ILO (the measurement used for unemployment) racked in at 2.67 million or 8.4%, a rise of over 48,000. With the amount of people in the UK claiming benefits rising by 6,900 to amount to over 1.6 million, more than some economists had originally forecasted.
Mervyn King, the governor of the Bank of England, again this week restated warnings that “the path of recovery is likely to be slow and uncertain” hinting at “zigzag pattern[s] of alternating positive and negative quarterly growth rates”. This comes contrary to figures published by the ONS showing that the Government paid off £7.8bn of the country’s debt last month, out doing the predicted £6.3bn set out and an increase of 50% to that paid off in January last year. Debt currently stands at 63% of GDP, but the official forecast of the ONS is for this figure to rise to 78% before it starts to head towards its decline. Despite being off his target of a deficit of £100bn, it is still expects that the total deficit for this year will run in at £120bn or 7.6% of GDP.
John Cridland, director general of the CBI, said upon interview that “The chancellor must use this budget to score the growth and invest policy goals he put forward in his Autumn Statement” suggesting that “delivering private sector investment in infrastructure will provide a real boost for UK growth and jobs.” He further insisted that economic growth in 2012 and beyond must be derived from the private sector, and in a letter to George Osborne advised that corporate balance sheets themselves hold the potential for the much needed private sector investment to stifle the still remnant lack in business confidence.
Shocking statistics were this week also revealed in the Bank of England’s figures, showing that lending by banks fell by £10.7bn in 2011, otherwise put; banks received £10.7bn more in loan repayments than they gave out in new loans. This takes the total figure of fall in loan administration to just under £83bn since 2008. Many have urged the Government and George Osborne to get tougher on the banks, especially Lloyds and RBS, which are part-owned by us the taxpayer, to force them to start lending again. Even Mervyn King has said “For a long period I have pointed out that the Governments own two of the biggest four lenders. If they own them, they can do something about it”, but would and intervention into the running’s of banks by the government be just a step too far?
The ‘potential’ in these banks and corporations suggested by the Director General of the CBI has currently not being seen. Government demands for more liquidity against loans administered by banks, are not having the desired effect of financial stability in that banks seek liquidity from external sources to shore up loans, but have consequently resulted in the reduction on the level of loans administered in order to achieve the liquidity ratios required. Similarly, cash flows in UK corporations are amongst the highest in the world right now, currently we are not seeing the much needed reinvestment in capital and company expansion that would see a fall in the rate of unemployment and positive growth to the UK economy. Quite oppositely we are in a situation in which CEO’s are retaining annual profits and administering them as dividends, in order to retain high share rates. But perhaps this has more to do with the bonus culture in the UK, in which CEO’s are given share packages and thus have a conflict of interest when it comes to these sorts of vital company decisions, than the Government’s economic policies?
The Government’s latest attempt to help small firms is through a ‘credit easing’ plan called the National Loan Guarantee Scheme, designed to lower interest rates paid by small and medium-sized firms by as much as 1 per cent. Chancellor George Osborne is expected to outline the details in the Budget next month. But with only five weeks to go, none of the major High Street banks has formally signed up. The CBI is generally supportive of Osborne’s measures to encourage public sector expansion, but believes the Chancellor needs to do more.
CBI boss added that “targeted changes” to the tax regime could go further to help encourage businesses to release investment required for growth. Cridland also counselled against loading businesses with environmental taxes at a time when future investment and growth remain uncertain. He urged Osborne to “ensure environmental taxes help to encourage new growth”. The CBI is asking the chancellor to reconsider setting air passenger duty rates at 8%, suggesting 5% would better “balance the amount of tax raised with the value of aviation to the economy”.
One major aspect of the CBI’s suggestion to the Treasury is in pushing for the case of extending new capital allowances to a wider range of infrastructure investments. The employers’ group also wants the Treasury to go ahead with initiatives to allow pension funds to invest more directly in infrastructure projects allowing for other avenues of investment in the private sector to be opened up, in times of tough credit. “While the state of the public finances is tight, the Chancellor still has an opportunity in this Budget to make sure the UK tax system is as internationally competitive as it can be.”
With £7bn to play with in his March Budget, Chancellor Osborne has been pounded with various ideas surrounding an increase in the personal allowance, which in April is already set to rise to £8,105. None other than Deputy Prime Minister Nick Clegg has been raising media attention around this policy issue, which unavoidably is being called an attempt by Lib Dems to ‘win back the voters’. In claiming ‘victory’, he is no more than pushing the chancellor in a direction he was already set to go in. A personal allowance target of £10,000 to be reached by the end of the parliamentary term was laid out in the coalition’s manifesto, but Clegg is calling for this to come sooner rather than later. The £7bn windfall facing the chancellor would be more than enough to raid the allowance in March to £9,000, it is estimated that every £1,000 rise in personal allowance will costs the Government £4bn.
However with Britain’s much vaunted AAA credit rating on negative outlook watch by rating agency Moddy’s, George Osborne might want to pocket the windfall for ‘a rainy day’ in an attempt to bring Britain’s public finances back under control more swiftly. As without a AAA credit rating to the chancellors name, what grounds do his further austerity plans have to stand on?