The 23rd March, 2011 and Budget Day in the UK, our blog received an interesting comment viz. In passing would just like to say that it does not matter what George Osborne likes to pretend will be the outcome of the Budget, the real winners will again be the banks from whom as a culture we must borrow, at excessive interest, if we want to eat, sleep and breathe. Changing anything other than that is purely cosmetic. Food for thought for you all!
This is a real problem for households and businesses but unfortunately for the government it cannot over-risk driving off-shore such a wealth creating sector as financial services, which has served to compensate for the reduced value-added contribution to the economy of the diminished British manufacturing base (see Chairmans Blog/ Categories/ Banks & Bonuses in the right-hand index column). Following the financial crisis, these banks are also still in the process of rebuilding their balance sheets and have adopted a more cautious lending policy towards both retail and business customers, who in turn find themselves faced with what they perceive as excessive rates of interest compared with before when money seemed cheap. Having, therefore, already taxed and pressurised as far as judged prudent the banks to reduce their level of bonuses and improve their lending levels to small businesses in particular, the Chancellor in this his second budget has hit instead upon another popular target for the public i.e. oil companies, with a £2 billion windfall tax to pay for a 1p cut in fuel duty (instead of the 5p increase due from next month).
The high price of oil in recent years having encouraged increased investment particularly by smaller companies in the rapidly decreasing reserves of economically accessible oil in the North Sea, there has predictably been an outcry from an outraged and surprised oil industry that this can only lead to job cuts and less investment. Nick Clegg, the Deputy Prime Minister, considers this a fair deal since these oil companies are making huge profits (rather like some banks). However, it is a gamble for a business friendly Chancellor looking for investment and growth in the economy, particularly when you reduce after-tax returns on profits from North Sea oil fields by a quarter, the off-shore industry accounting for a third of total industrial investment. The industry also mainly benefits Scotland and the North of England, areas which again face public spending cuts. It serves to illustrate just how little room the public spending deficit has left the Chancellor in which to manoeuvre when he also admits to having essentially used up the political capital or public goodwill gained from winning the last election, by the tough but necessary things he is doing.
A problem for his termed Vision for Growth Budget is that he was forced at the same time to announce lower forecast growth rates of 1.7% and 2.5% for 2011 & 2012 respectively (although then rising to 2.9% in 2013/2014) with, in addition, the Office of Budget Responsibility (OBR) saying it made no difference to its own forecasts, which were themselves downgraded from 2.1 % to 1.7% this year and from 2.6% to 2.5% next year.
That said, the Chancellor revealed a number of business?friendly measures including a surprise 1% reduction in the main rate of corporation tax which will be cut to 26% from April 2011 and reduced by 1% per year thereafter to 23% in 2014. There was also the introduction of 21 new enterprise zones, improved incentives for R & D and a strong indication that the current 50% top rate of income tax was considered only a temporary measure (certainly considered politically impossible to scrap immediately, given the strong public feeling on the issue e.g. of highly paid bankers & their bonuses). These enterprise zones will offer discounts on business rates, provide super-fast broadband communications and have more efficient planning rules to encourage the establishment of new businesses. The Green Investment Bank will also receive an extra £2 billion of seed money, although the Green lobby was not too happy about the 1p cut in fuel duty.
The above measures aimed at rejuvenating the private sector were broadly welcomed by analysts although recognising that the government was still gambling on growth whilst continuing to cut public spending so deeply. Public spending would also be a cumulative £44 billion higher than expected over the course of the current parliament according to the OBR. In addition, the national debt would now reach 70.9% of GDP in 2013/2014 (£1.25 trillion), worse than forecasted last November.
Ending on a more positive note, the head of WPP, the largest advertising company in the world, was moved to comment that WPP would now be considering relocating their HQ back to the UK instead of remaining in Ireland. Forecasts for growth in world trade are also being marked higher, the UK manufacturing sector is performing well and the OBR is still expecting private sector employment to have increased by 1.3 million by 2015, compared with a decrease of some 400,000 public sector jobs. Such growth remains dependent upon a number of variables such as businesses having the confidence to start reinvesting and hiring more people, despite rising inflation, the state of the banking system, the outlook for household spending and unexpected events in a globalised trading world.