Partner Article

Osborne played his hand well, but uncertainty lingers

The numbers behind the Autumn Statement are currently being pored over by economic commentators, looking for holes or hidden surprises. An early assessment from the Institute of Fiscal Studies claims that the Chancellor will have to find an additional £27bn in spending cuts or tax rises from 2015 to complete his plans, and there is justified scepticism about the optimistic growth projections on which these plans rely.

There is inevitably a considerable amount of uncertainty about the UK’s economic future, much of it due to factors beyond the Government’s control – there is no resolution in sight for the eurozone crisis, or for negotiations to prevent the US falling off the ‘fiscal cliff’. In this context, the Chancellor’s room to manoeuvre was limited, but he played the cards he was dealt with skill.

Businesses needed policies in this Autumn Statement to boost their confidence, and they got perhaps more than they had expected.

At the top of the list is the surprise reduction in the main rate of corporation tax to 21 per cent. Cutting the tax burden is this way spreads the benefit as widely as possible. We are relying on the private sector to be the powerhouse for future growth. It is already pulling its weight, more than replacing the jobs lost in the public sector under the Government’s necessary austerity plans, but there is more to be done. The Institute of Directors would like to see the rate cut down to 15 per cent over the next few years.

Of course, the kind of austerity the Chancellor chooses matters. Investment in infrastructure produces much greater economic benefits than spending on Government departments or welfare. The Chancellor has decided to shift £5bn from Whitehall towards building projects and this is to be welcomed. However, there is a long list of projects that need attention, the UK’s road system in particular has suffered from historic under-investment. Osborne could do more to switch funds from day-to-day expenditure towards these vital projects.

Potentially very significant were the announcements made on shale gas. The US has seen a big drop in energy prices through exploiting their shale reserves and we hope the UK could have a similar experience. We don’t know exactly how large our reserves are, but on conservative estimates we could see 35,000 new jobs created. The safety concerns can be addressed with proper regulation and we urge the Government to allow test drilling to begin again as soon as possible.

Other measures which will help business include the decision to scrap the planned fuel duty rise. It would have been a bad time to load businesses and their employees with more costs. The extension of the small business rate relief scheme until 2014 is also a positive move as rates much up a large part of small firms’ total tax bill.

An interesting development to keep an eye on is the plan to allow Head teachers to set the pay of their teachers, basing wage rises on performance rather than just time served. The Chancellor held back from extending the principle to the rest of the public sector, but if it proves a success in schools there is no reason it should not apply in other areas. Despite the pay freeze, public sector pay is still rising, making it hard for private sector employers in many regions to compete. Living costs vary across the country, so it makes sense to vary wages.

The Autumn Statement was not all good. Cuts to pensions relief will do nothing to encourage saving. The Government still lacks a coherent plan for retirement saving and is merely storing up problems for the future. On the overriding objective, tackling the deficit, the Chancellor gave in to the considerable political pressure, pushing back austerity. As a result, he looks further and further away from hitting his fiscal targets. One of the ratings agencies, Fitch, has already warned they may downgrade the UK’s AAA rating, reinforcing just how important it is that we get the deficit under control. If the growth projections do turn out to be too high the situation begins to look even bleaker. Tough decisions on public spending lie ahead, politicians will not be able to duck them forever.

This was posted in Bdaily's Members' News section by Institute of Directors .