EY ITEM Club Budget Preview 2014

EY ITEM Club Budget Preview 2014

Business implications

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What should businesses look out for in the Budget?

Surely nothing of note will be announced?

The Autumn Statement was only just over 3 months ago and little has changed. The UK economy appears to be gathering momentum nicely: recent data releases and forward looking surveys all suggest that GDP growth of somewhere between 2.5 and 3% is likely for 2014, in line with the EY ITEM Club Winter forecast. Many commentators continue to worry that the recovery is unbalanced and too reliant on consumer spending but there is no denying that business and consumer confidence is strong.

Against this backdrop and with an election just over a year away it seems unlikely that George Osborne would want to risk upsetting the economy. However, the Chancellor is a tinkerer: he has introduced just under 60 policy changes on average in his Budgets and may be unable to resist the temptation to try and fine tune things a little more.

So what might he do? The EYITEM Budget preview highlights areas where there could be action and many other bodies have published their own thoughts, naturally reflecting their specific interests to some extent. If we take our simple model of GDP in the economy as being the sum of Government spending plus the balance of Trade plus Investment and Consumption by the private sector, we can identify what to look out for.

Little change in Government spending...

The Chancellor used the Autumn Statement to lay out his long term spending philosophy and to introduce the target of achieving a surplus during the next parliament. EYITEM estimate there could be £30 Billion more of austerity than will be required to meet the Chancellor's targets. But as he only defined future policy 3 months ago, there is unlikely to be much change in approach this week.

...or on trade...

The UK's trade performance is driven by external markets to a significant extent and it is not clear that there is much that the Chancellor can do with the limited flexibility on resources available to him, particularly given his commitments on public finance. A left field option might be to follow up on the 'Reshoring" theme identified by the Prime Minister in his recent Davos speech and to provide more resources to help kick-start activity, perhaps with grants to support relocation costs.

...but what about the investment we need?

The lack of growth on business investment is the most frequently raised concerns about the UK's recovery. The consumer and housing led recovery now requires businesses to start investing and generating returns to support continued hiring and increases in real wages. Without this EYITEM and others worry that the consumer recovery will run out of steam.

Any initiative needs to be designed to address an issue seen as a barrier to investment. If poor expected returns on investment are seen as the reason for low investment then capital allowances could be used to incentivise investment by increasing the potential returns by reducing the tax charges.

However, if investment is being held back by other factors such as the structure of management incentive packages that reward short term performance and hence make investing in immediate margin improvement more attractive than investing for long term growth, alternative approaches are required. These are however likely to be complex to design and are probably a step too far at this stage of the political cycle.

More plausible initiatives at this time for the introduction of schemes to drive investment could involve greater tax breaks for enterprise zone based initiatives in the regions and possible sector based programmes for which there is a need, energy is a possible example.

And don't forget the consumer

The consumer has responded well to the Chancellor's boost to incomes and the housing market in the last Budget. The political battleground has shifted somewhat with the increased focus on affordability agenda. The Chancellor is likely to want to do something to benefit low earners and may move from his favoured tool of the personal tax allowance to National Insurance contributions, possibly with tweaks to incentivise the hiring of younger workers. This should be good news for many businesses, reducing the pressure for wage rises and putting more money in the hands of the share of the population most likely to spend it.

In addition to moves on the income side of the household finances, the Chancellor considers ways to address the cost of living. The EY ITEM Club Housing Report suggested a housing bubble was unlikely but also identified a shortage of housing as a factor driving up both house prices and rental levels. Initiatives might range from adjustments to Stamp Duty thresholds, support for building affordable housing or changes to planning regulations.

Steady with a twist

Overall this is likely to be a steady as she goes budget but there may be the odd twist worthy of note.

Mark Gregory, EY Chief Economist