The Chancellor’s autumn statement was delivered in the context of a UK economy underperforming on growth expectations not only this year, when the UK economy is expected to shrink 0.1%, but in the subsequent 3 years. This is compared to growth forecasts by the OBR in March 2012.
The lack of progress in the economy means that the Chancellor has not received the tax receipts that he expected and his expenditure on welfare has increased. This has resulted in a budget deficit which is £12 billion higher this year than was expected and will exceed forecasts made in March 2012 for every fiscal year to 2016-17. Packaged together, all this means UK debt as a percentage of GDP, will continue to grow beyond 2015.
So from the perspective of UK Plc was the Chancellor’s budget good for business?
- The continued emphasis on fiscal discipline means that long term interest rates on government debt are approximately 1.8% compared to the 3.1% that the current government inherited in 2010. At first glance this would appear to be a good thing. However the historic link between government long term interest rates and the commercial rates paid to secure bank debt or bond finance has been one of the most important casualties of the recent economic downturn. So much so that it is not exceptional for companies to be paying interest rates closer to 10% for bond finance, making the governments long term interest rate a commercially irrelevant benchmark.
- In order to stimulate the economy the chancellor needs to bolster consumer confidence. The most obvious way to do this is by stimulating employment. The Ernst and Young ITEM club recently identified £14bn of ‘shovel ready’ investment projects that could stimulate the UK construction industry. At best the chancellor’s budget stimulated £5bn of this type of expenditure, although a significant proportion of his announced expenditure would not meet the ‘shovel ready’ criterion. So, the Chancellor’s announced expenditure will not happen immediately but instead will slowly drip into the economy over a number of years.
If anything, unemployment is expected to increase in the short run, which can only dampen consumer confidence further. This effect will be further accentuated by the reduction in welfare benefit, including child benefit. The net effect is that households are unlikely to feel re-invigorated by the autumn statement.
- Business confidence still remains low with the key PMI indicators for construction and manufacturing below 50. The reduction in corporation tax and improved capital expenditure allowances is likely to add to the cash balances on UK Plc’s balance sheets. The size of these cash balances are now the topic of popular mythology, however I would suggest that the chancellor did little to persuade corporates that the time has come to engage in some serious quantities of capital expenditure. Insipid growth forecasts are likely to result in ‘steady as she goes’ investment strategies at best.
And good for Procurement…?
A fresh approach to public-private partnerships, was published as part of the Autumn Statement, which outlines plans for the replacement to the Private Finance Initiative (PFI), which it said had become “tarnished by its waste, inflexibility and lack of transparency”. ‘Private Finance 2’ (PF2), it said, will address the weaknesses of its predecessor, such as a “slow procurement process” and “insufficiently flexible” contracts.
The report said the procurement for the Priority Schools Building Programme, the first project through PF2, would be carried out by a new central unit within the Department for Education called the Education Funding Agency – so time will tell. Further, it said, in future all government departments will be “encouraged to establish a central unit when embarking on a new programme”. So this sounds like a sensible move forward to an approach that clearly needs longer term adjustment to make it work. But the key here, as with so many of these things is the right people, that is the right procurement people have a crucial role to play.
The report also suggested that consideration is being given to a more extreme shift to centralised procurement by creating a single centralised unit covering all central government PF2 projects. The report said: “The government recognises that departmental centralisation of procurement, while representing a significant step forward, does not go as far as establishing a single, centralised procurement unit. The business case for such a unit will be kept under review during the [Infrastructure UK] and [Major Projects Authority] assessments and when future pipelines are confirmed
Other measures proposed for PF2 include requiring ministers to commit to an ambitious timetable, including completing the tendering phase within 18 months, simplifying the documentation involved, and for Treasury to carry out checks on projects prior to them going out to market.
So given that we have a chancellor who is wedded politically, philosophically and economically to the notion of an ‘expansionary fiscal contraction’ what does UK Plc require him to do if consumer and investor confidence is to be restored?
- Ensure that any expansionary government expenditure is dispersed quickly and in those areas which create employment; construction is particularly attractive in this respect because of the low import content in the construction supply chain, and most of the cash spent stays in the UK.
- Use his office to put pressure on the banking system to start providing debt finance to UK Plc at rates which reflect the current low cost of their wholesale funds. We need our banks to get out into businesses and start assessing risk, rather than taking the decision to avoid risks in certain sectors of the economy. Unfortunately construction too often falls into this latter category.
- Where funding has been put in place for SMEs, the money has to be disbursed effectively, which means swiftly. Clunky, difficult to access public funding mechanisms, quickly turn into redundant, if well-meaning, white elephants.
- Lastly the Chancellor may wish to consider a New Year’s resolution whereby he resolves to use the word ‘growth’ more than ‘austerity’ by a factor of 10.