Saturday, April 12, 2003
Not a budget for industry
Posted by David Smith at 09:16 PM
Category: David Smith' s magazine articles

What did industry get from Gordon Brown’s April 9 budget? One is tempted to say zero, zilch. That may be going too far but the verdict of the Engineering Employers’ Federation – “manufacturers had low expectations from this budget and were not surprised by the result” – got pretty close to it.

Industry did get, it should be said, some new forecasts. According to the chancellor, the expected manufacturing recovery has been postponed again. Output, after sliding by 4% last year, will grow by only 0.25% to 0.75% this year, strengthening to 2.25% to 2.75% next year. In case anybody is tempted to think this is the start of a new industrial renaissance, however, the Treasury offers little encouragement. Output growth slips back to between 1.75% and 2.25% in 2005 according to the new forecasts.

If this sounds like a fairly downbeat prospect, that impression is reinforced when taken in conjunction with what is an upbeat overall growth forecast. This year, to take the mid-point of his range, Brown expects the economy to grow by 2.25%, accelerating to 3.25% for each of the following years. Industry, again, is expected to lag overall economic growth by some distance.

One reason is that previous predictions of an early recovery in business investment have come to nothing. The Treasury is now looking for a drop of between 1% and 1.5% in business investment this year, after last year’s 8% fall, The following years look better, with investment predicted to rise by 5% and 5.6% respectively. Given the record, however, it is probably not wise to bet the business on it.

Before leaving the macroeconomics of the budget, it is worth mentioning two other things. The first is that, if the chancellor is too optimistic on growth, or on tax revenues, there will be a hole to be fixed in the budget – beyond the 27 billion of borrowing predicted for this year. Business has borne the brunt of Brown’s tax hikes so far, and would have reason to be fearful if he has to put up taxes again.

Second was what the budget said, or did not say, about euro entry. The chancellor singled out slow growth in Europe, and its contrast with Britain, which has not had a quarter of declining GDP since 1992. But he did not (or was not allowed to) unveil his expected “no, not yet” verdict on euro entry. It would nevertheless be a surprise if there is a Treasury green light for membership any time soon.

What about the budget detail? As I say, this was not a package that could remotely be described as a “budget for industry”, although there were a few crumbs from the table.

They included, for small businesses, extending 100% capital allowances for investing in formation and communication technology (ICT) for a further year; improvements to the R & D tax credit, enabling more businesses to claim a wider range of relief, together with consultation to ensure the scope of the credit remains competitive internationally; and additional measures to promote workforce skills, including the launch of six new Employer Training Pilots.

Industry also welcomed the freezing of climate change levy (CCL) rates, and the chancellor’s announcement that there will be a further discussion with business on expanding CCL agreements.

That, in a budget tight for cash, was that. For industry, then, hopes must rest with some of the longer-term hares set running by the chancellor. Thus, he called for an investigation into housing supply by former CBI chief economist and monetary policy committee member, Kate Barker. The Treasury wants to free up planning to allow more houses to be built, in the hope that this will damp down housing boom and bust.

At the same time, another economist, Professor David Miles of Imperial College, London, will examine whether there is scope for shifting mortgage finance in Britain to long-term fixed interest rates – more than the five years that is the usual maximum for fixed rates at present.

These investigations may not come to anything, and they may not sound directly relevant to industry. But they could turn out to be significant. Britain’s housing market has been the main factor, over time, keeping interest rates higher than they needed to be.

There are other straws in the wind. Brown seems serious about achieving a genuine spread of economic activity around the country, partly by shifting more civil servants out of London, partly by encouraging enterprise and business development. Again, it may turn into nothing, but it is worth keeping an eye on.

In the end, business has to hope Brown is right in his optimism about economic recovery, and too downbeat about how industry will do within that recovery. The budget was a holding operation, at a time when the chancellor did not have very much to say. The hope has to be for genuinely better news next time, but don’t hold your breath.

From Industry magazine, April 2003

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