Ernst & Young ITEM Club calls for Treasury to sign £14bn cheque for two-year investment in shovel ready infrastructure projects... ...And more help for first-time buyers, in its Autumn Statement preview report
- Ernst & Young ITEM Club says that, of all the fiscal tools available to the Chancellor, capital spending would have the biggest impact on growth
- The report is also calling for fiscal stimulus to ease the plight of First-Time Buyers (FTBs)
- Triple whammy of bad news from the OBR is expected for the Chancellor
- Ernst & Young’s tax practice says the Chancellor needs to set out his thinking on tax avoidance and ensure ‘those with the broadest shoulders bear their fair share’ of tax
A £14bn injection of infrastructure spending for shovel ready projects in this month’s Autumn Statement would add 0.5% a year to GDP, improving the UK’s short-term economic growth prospects, according to the Ernst & Young ITEM Club.
In its Autumn Statement preview report, out today, the Ernst & Young ITEM Club says that while the Government’s fiscal strategy has been a necessary response to the UK economic crisis, cuts to capital spending have been too deep.
Infrastructure spending has almost halved in four years from £51bn in 2009/10 to £27bn in 2011/12, damaging the recovery of key sectors such as construction and reducing GDP by just over 1.5%. Yet the Ernst & Young ITEM Club says capital spending is widely acknowledged to have the highest impact multiplier of all the fiscal tools available to the Chancellor to kick-start growth.
It believes that if calculations from the Office for Budget Responsibility’s (OBR) hold true – £1bn of capital spending boosts GDP by £1bn – then £7bn of capital spending per year for the next two years would boost GDP growth by 0.5% in each year. And because capital spending has the added advantage of not being included in the Government’s fiscal mandate, a small stimulus of this type wouldn’t impact the main fiscal target.
Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, comments:
“The key to this policy is in finding projects for which all of the planning and logistics have already been completed, and where all that is missing is the funding to put the shovel in the ground. This could include numerous transport projects, in particular the roads, and also essential repair and maintenance work on our hospitals, schools and other public buildings.”
Housing market would also benefit from a fiscal policy injection
In the report the Ernst & Young ITEM Club also calls for fiscal stimulus to ease the plight of First-Time Buyers (FTBs). It says that now the banking sector is healthier than it has been since the start of the financial crisis, and with Funding for Lending likely to increase the supply of mortgage funding, attention should now be turned to FTBs.
“There is a clear case for helping FTB’s,” says Goodwin. “They have been hit hardest by the tightening of credit conditions which in turn has frozen activity across the housing market. An easy and relatively cheap solution to get things moving again would be to reinstate the stamp duty holiday for FTBs, or even abolish it altogether.”
The Ernst & Young ITEM Club says it would also like to see schemes like the First Buy home equity scheme expanded to further the availability of funding to FTBs.
Commenting on possible tax measures that may be announced, Patrick Stevens, tax partner at Ernst & Young added: “We aren’t expecting any substantial changes to the direction to tax policy in the Autumn Statement. However there are two areas where the Chancellor needs to set out his thinking. The first is tax avoidance, which has been the subject of intense media and political scrutiny in recent months. We are expecting to hear updates on the General Anti Abuse Rule (GAAR), the expansion of the disclosure regime, and the work being done by the OECD to review the international rules on profit shifting by multinational companies.
“The second big priority for the Government will be to demonstrate that ‘those with the broadest shoulders bear their fair share’ of tax. The Chancellor’s red box is likely to include restrictions in the annual pension contributions relief, and possible increases in the higher levels of stamp duty and Capital Gains Tax rates.”
Chancellor faces triple whammy of bad news from OBR
Fiscal stimuli aside, the report says that much has moved on since the OBR published its last economic forecast in March. In the last eight months the Eurozone crisis has decimated UK exports and persistently high inflation has delayed the consumer recovery, while the slump in North Sea oil and gas production has created a hole in the Treasury’s tax receipts.
The Ernst & Young ITEM Club warns that this deteriorating economic outlook and a fall in tax receipts will lead the OBR to significantly downgrade its economic forecasts on Wednesday (5 December), in a triple whammy of bad news for the Chancellor. It forecasts that:
- 1. The OBR is expected to revise its GDP forecast to -0.1% and 1.2% for this year and next year respectively, down from the 0.8% and 2% growth it had predicted in March.
- 2. The OBR will reveal an £8bn overshoot in the borrowing forecast, with the deficit on the Public Sector Current Budget increasing to £103bn in 2012/13.
- 3. It’s increasingly unlikely that the Chancellor will be able to meet his supplementary target, which requires public sector net debt to fall as a share of GDP between 2014-15 and 2015-16. We predict that the OBR’s forecast will show PSNBX rising by 0.7% between the two dates.
Austerity programme could be extended to 2018
Commenting on the deterioration in the OBR forecast, Goodwin says he firmly believes it is due to cyclical factors. However, he warns that there is a real risk that the mechanical methodology of the OBR will lead them to suggest that tax revenues have been subject to further permanent damage.
“If this happens,” says Goodwin, “the Chancellor may find himself stuck between a rock and a hard place. Rather than breaching his fiscal mandate, the Government could be forced to announce another year of spending cuts extending the austerity through to 2018. This would effectively commit the next government to three years of spending restraint and would lengthen the austerity programme to eight years. Given the fragility of the recovery, this would appear to be preferable to any further tightening of policy in the short-term.”