Today’s Budget included new economic forecasts by the independent Office of Budget Responsibility (OBR). These showed the OBR revising down its forecast for GDP growth, productivity growth and business investment in the UK over the next five years. The last Chancellor boasted of "fixing the roof while the sun is shining". Today's official Budget forecasts for growth suggest that rather than fixing the roof of the economy, he actually focused on paying off some of the mortgage. The OBR attributes most of its reduction in forecast GDP (average GDP growth of 1.4% a year for next five years) to continued weak productivity performance in the UK, following historically low levels of productivity since the financial crisis.
Raising Productivity: some progress, little money, nothing on exporting
As our Vibrant Economy Index shows, productivity and GDP growth is booming in some parts of the country and we know some sectors are thriving. Across the UK economy as a whole, there is a long tail of low growth and low productivity. Raising productivity as a whole and spreading growth is therefore a priority. Levers for boosting productivity include modern infrastructure, innovation, skills, exports and finance for scale-up businesses.
The Budget included some eye catching – and welcome – announcements on transport investment decisions, patient capital for scale-up businesses and on skills and training. But a look at the Treasury’s financial tables shows that there is very little new money for these in the Budget. On innovation the R&D tax credit increase makes a difference and there is an extra £2.3 billion for R&D spending… in 2021. Most announcements seem to be recycling existing budgets.
Exports: a missed opportunity
On exports, the Budget announces that UK Export Finance (UKEF) will introduce a new guarantee to banks designed to increase liquidity in the supply chain. This will improve exporters’ access to capital and enable their suppliers to fulfil new orders. This does meet a risk we have identified in helping clients plan for Brexit: different scenarios for customs on UK-EU trade after Brexit point to additional working capital pressures; hopefully this will help. Unfortunately this is the only measure to boost exports in the Budget. Faced with a trade deficit, challenges of Brexit, and opportunities in growing overseas market, the Budget said nothing else about exporting. We can only hope that the Industrial Strategy being published by the government next week includes more, but it seems there will be no extra money.
Skills and immigration
There were some measures which Grant Thornton has been calling for, based on our discussion with people across the country (and summed up in our Blueprint for a Vibrant Economy). On immigration and skills, it was good to see the Government acting on an issue that people constantly raise with us when we discuss how to shape a vibrant economy: making it easier for universities to attract world class talent and for UK employers to take on international students when they complete their studies in the UK. The government announced it will change immigration rules to enable world-leading scientists and researchers to apply for settlement after three years; make it quicker for highly-skilled students to apply to work in the UK after finishing their degrees; and reduce red tape in hiring international researchers.
Our work advising clients on utilising the apprenticeship levy has shown that greater flexibility in the levy is needed to increase uptake. Help with developing new apprenticeship standards and faster approval of these, coupled with some flexibility to invest in other training, particularly in disadvantaged communities, would be most welcome. The Budget includes a cryptic sentence: “The government will continue to work with employers on how the apprenticeship levy can be spent so that the levy works effectively and flexibly for industry, and supports productivity across the country.” No more detail is available at this point; let’s see if this results in changes that meet employer, employee and community needs, or if there is an ulterior motive.
Finance for dynamic growth businesses
On finance to unlock scale-up business growth, the Government set out a range features following its review of ‘patient capital for innovative businesses’. At Grant Thornton we were delighted to see a number of measures we called for in our evidence to the review:
- A permanent ‘ever green’ capital structure to make long term investment in growth businesses.
- Widening the scope of the EIS and SEIS tax reliefs.
- FCA to relax investment criteria and conditions for investment regulated personal pension plans to make it easier to invest in start-ups and scale-ups.
Local growth: will industrial strategy deliver?
In the run up to the Budget we called for the Chancellor to prioritise new local devolution deals in England to support innovation in delivery of public services and to set out a firm commitment to financing cross-Pennine transport links. The budget included detail on further feasibility work on Trans-Pennine transport but no firm commitment to construction as yet. On devolving powers to towns and cities, there was an additional ‘devolution deal’ for the West Midlands but compared to previous recent Budgets, there were very limited plans to devolve powers further. We understand that Monday’s industrial strategy will include more on ‘local industrial strategies’; and hope that local leaders will have the tools to deliver these.
What about Brexit?
The three big spending commitments in the Budget are on housing, the NHS and Brexit. The £3 billion allocated for preparing for Brexit over the next two years is the second largest single new spending commitment. This shows the scale of change involved in Brexit. It does not augur well for productivity, given it anticipates increased administrative costs. The OBR’s own assessment of the economic impact of Brexit gives us few indicators. Commenting on how they have taken account of Brexit negotiations, the OBR says ”we still have no meaningful basis on which to form a judgement as to their final outcome and upon which we can then condition our forecast”. The OBR estimate of impact of Brexit on economic forecast does not, as a result, include any estimate of possible customs duty changes.
In summary: good politics; less substance on economic challenges
Political instability and economic circumstances mean that Philip Hammond was dealt a poor hand for this Budget. Politically he seems to have played it deftly, offering just enough on all the political touchpoints and pulling together a decent housing package. This should keep him in a job and steady the fragile government. What the Budget does not achieve – and next week’s industrial strategy seems unlikely to – is a clear plan for transforming the UK economy, curing the national productivity sickness and getting us match-fit for a future outside the EU. It covers some of the right bases (with the glaring omission of exports) but to create a vibrant, inclusive economy it will need significant new investment and innovative ways of delivering through collaboration with business and civic society.
Chancellor Philip Hammond has given a sobering assessment of the economy, saying it is expected to grow more slowly than previously thought.