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What the Chancellor must do in Autumn Statement

When George Osborne presents the Autumn Statement on 5th December his priority should be to get the economy moving as soundly as possible without jeopardising the UK’s credit rating. The UK has the flexibility of having its own currency; therefore whilst we are impacted by the Eurozone and global downturn we have maneuverability that other countries may not have.

MyMoneyPA is a consumer champion; putting consumers in control and providing services that allows them to save time and money. With the belief that the Autumn Statement is an opportunity to give some much needed growth to the economy and restore some consumer confidence, MyMoneyPA recommends that there is less tinkering with initiatives and more strategic goals set. The company has put together a 3 point plan for consideration by the Chancellor prior to his announcement in December.

1. Reduce the fuel duty permanently by 6p per litre. More on this topic and the rationale for the reduction later.

2. Accelerate Funding for Lending, which is still not finding its way to small businesses.

3. To provide incentives for the creation of new energy suppliers as well as continuing the drive to make pricing easier to understand, reducing the plethora of products available and monitoring the prices charged.

The Government have a £35bn quantitative easing windfall that could be used to cover the fuel duty reduction which will cost net less than £4bn and there is still a substantial amount that can be used to meet Mr Osborne’s “fiscal mandate”.

The biggest single impact in the Statement could be to reverse the planned 3p increase in fuel duty and implement a reduction instead. The size of the reduction can be considered and modeled however MyMoneyPA believes a significant reduction of say 6p would be best to stimulate the economy. The National Institute of Economic and Social Research believes that a 3p increase will cost around 35,000 jobs and will increase headline inflation by about 0.3% introducing the possibility of the Bank of England needing to increase interest rates to offset inflation well above its target of 2%.

The alternative scenario of reducing the tax on fuel has a positive impact on GDP growth and jobs. A permanent 3p decrease (when compared to the planned increase) will create around 70,000 jobs and increase GDP growth by about 0.2%. It will cost the treasury £1.8bn net. A temporary 10p cut (effective for a year) will increase consumer spending by 0.5%, will create 100,000 jobs (some temporary due to the temporary cut) and cost around £4.5bn whilst also having a positive impact on inflation.

Why is this tax cut being proposed? There are numerous things to consider; any increase/decrease of fuel duty will have the biggest impact on those on lowest income as fuel expenditure represents around 7.5% of their total expenditure. UK duty on diesel, which represents the majority of the UK road fuel demand by volume, is the highest in the Europe. The French are currently considering a fuel duty cut and the US is considering increasing output to lower production costs.

Additionally the International Energy Agency expects the average import price of oil to fall from $107 a barrel this year to $89 in 2017 so we should generally see prices at the pumps coming down but as the tax is a set amount the government will not lose tax receipts other than the suggested cut. Inflation will be reduced and consumer spend should increase. Generally prices will be reduced, especially food, due to the reduced transport costs creating a positive impact on inflation.

The fiscal impact - fuel duty is the fifth largest contributor to Government tax revenues after income tax, National Insurance, VAT and corporation tax – is not significant in the big picture. The reduction of the fuel duty tax will be offset by increases in all the others as a result of more jobs and greater consumer spending. So this is a great way to assist the UK in getting out of the downturn.

There will be those that want to force the consumer off the road by pricing fuel in a way that forces people onto public transport and other modes of travel but this is impracticable and damaging to the UK economy. There are so many initiatives now that are working to replace/enhance the combustion engine that the ecological impacts can and will be moderated in the future. Yes, we increase pollution in the short term but improve the economy and by doing so generate longer term ecological benefits.

In addition to tax there is a need to further support businesses as the road to economic recovery lies with the thousands of small and medium sized companies (SMEs) that can grow and create jobs to inject much needed purchasing power into the economy. SMEs accounted for 99.9 per cent of all private sector businesses in the UK, 59.1 per cent of private sector employment and 48.8 per cent of private sector turnover. However it is this sector that needs most help to raise confidence to employ more staff, the Funding for Lending programme is just not getting through to businesses that need it. The major banks require a change in attitude towards their role, directed and properly incentivised by Government.

Big businesses have a significant part to play too and can be influenced by Government. Not in job creation, as they are typically a net destroyer of jobs, but in releasing the huge cash mountains they are sitting on. They can do this in two ways, one is to start investing again and the other is to commit to paying suppliers within 30 days. The latter situation provides stability for SMEs and will assist in raising confidence. The Government’s ‘supply chain finance scheme’ does not solve the problem of lengthy settlement times as the SME still gets hit with an interest charge; it needs self governance by big companies within corporate social responsibility.

We need to see more competition in the energy markets so as well as getting more clarity and simplification with products, as recently announced, there should be incentives given to create new energy companies. Ovo Energy, founded in 2009, was recently voted Which’s top energy supplier. There also needs to be greater scrutiny of the prices charged and profit margins of the big six companies.

The consumer is ultimately the driver of growth; consumer confidence must be restored so they start spending again. They need to be sure of their jobs, their budget needs to be boosted by a tax break, and they need to have confidence that their household budgets are not going to be squeezed further. Glenn Morrill of MyMoneyPA states “we believe people are straining at the leash to start spending again but until their confidence is restored their fears from the past few years’ events will restrain their actions. The three biggest concerns at the moment are the cost of fuel, the cost of energy and the cost of food. Our suggestions to the Chancellor will assist with allaying those concerns”.

So the Autumn Statement is a chance for the Government to make some bold decisions, whilst keeping a tight rein on expenditure, so we can restore consumer confidence and begin to see the shoots of real growth for the UK economy. The response from SMEs and the consumer will be positive as they are consistently asking for more to be done. And if the big companies can be persuaded to participate, then you can really say ‘we are all in it together’.

This was posted in Bdaily's Members' News section by MyMoneyPA .