The Chancellor delivered a joint Spending Review and Autumn Statement to Parliament yesterday. The Autumn Statement was used to give an update on the state of the economy and respond to the economic and fiscal outlook published by the Office for Budget Responsibility (OBR).
Following shortly after the changes announced in the Summer Budget, the Autumn Statement and the first Spending Review in five years identified further savings required to eliminate the fiscal deficit in the coming years.
Fiscal consolidation remains the centrepiece of the Government’s policy framework, with the Chancellor reiterating his intention to achieve a budget surplus by 2019/20. The Government will borrow £73.5bn in the current fiscal year. This will continue to fall in each subsequent year. Government finances are projected to move into a surplus in 2019/20, of £10.1bn, rising to £14.7bn in 2020/21. The OBR forecasts that debt will fall as a percentage of GDP this year, and in each of the subsequent four years.
Persistently low inflation should help facilitate the Government to meet its fiscal targets. Meanwhile, the continued delay to monetary tightening (expectations are now that the Bank of England will keep the benchmark interest rate at its record low of 0.5% until mid-2016) means that government debt-service costs will remain low by historical standards.
Despite a slowdown in UK GDP growth in the third quarter of 2015 to 0.5% (ONS preliminary estimate), from 0.7% in the second quarter, the OBR 2.4% forecast for growth in 2015 has remained unchanged from June. The OBR has also slightly revised up its economic growth forecast for subsequent years to 2.4% in 2016 and 2.5% in 2017. Upward revision to the OBR forecasts means that public finances are set to be in a stronger position over the forecast period than at Summer Budget 2015. The underlying forecast for tax receipts is stronger and debt interest is lower.
The improvements to the forecast since Summer Budget 2015 mean that the remaining consolidation now required is £18 billion. Spending Review 2015 delivers £12bn of savings to overall Resource Departmental Expenditure Limit (RDEL) spending. The Government is introducing an apprenticeship levy which will be worth £3bn by 2019-20 and funds 3 million apprenticeships. The remaining £3bn is being delivered through reforms such as Making Tax Digital and further measures to tackle tax avoidance.
The UK’s economic recovery is now well established. In fact, it has been the fastest-growing advanced economy, alongside the US, since 2010. However, the fiscal situation has as its backdrop increased downside risks of a slowdown in global GDP growth. In its latest World Economic Outlook, published last month, the IMF has noted that downside risks to global economic growth have increased. Also, with UK debt at the highest share of GDP since the late 1960s, risks remain.
In such market conditions, it remains important to support growth of strategic sectors of the UK economy. The financial and related professional services industry is a structurally important sector and is on average 70% more productive than the rest of the economy and is the largest tax payer in the UK. The industry generated net exports totalling £72bn in 2014, which was more than the combined total of all other net exporting industries in the UK. As well as providing support functions that underpin all other sectors, financial and related professional services are a major employer in their own right. More than 80,000 jobs were created in 2014, which took employment in the sector to a record level of over 2.2 million.
Given that the UK’s budget deficit is structural, not cyclical, eliminating it presents a serious challenge. Should the UK’s economic recovery start to wane on account of global headwinds, tax receipts would be adversely affected, threatening the ambitious deficit-elimination target. The Autumn Statement revealed that much of the fiscal consolidation effort is being borne by targeted policy areas. For example, tackling tax avoidance, evasion and imbalances in the tax system will generate around £5bn. TheCityUK has consistently put forward the view that firms must pay the tax for which they are legally liable, and we believe that the implementation of measures to clamp down on tax evasion and avoidance will reinforce the message that no companies are above the law.
Bank funding costs have fallen substantially since the introduction of the Funding for Lending Scheme (FLS) in 2012. The FLS will continue to support lending to SMEs into 2016. TheCityUK welcomes the announcement by the Chancellor to further support small businesses by extending the doubling of small business rate relief (SBRR) in England for 12 months to April 2017.
Maximising the contribution of SMEs to the economy necessitates that their financing needs be met prudently. In the UK, SME borrowing is particularly reliant on the traditional banking sector. Recent trends show a pick-up in the volume of bank lending to SMEs. Bank of England Q3 2015 data shows that there was £42bn in flows from banks to SMEs in the first three quarters of this year. This was up 12.9% on the same period in 2014, partly a result of government initiatives such as the Funding for Lending Scheme. Innovations in UK-developed technology and market-based financing solutions offer complementary options alongside bank lending. Lack of information is however a major constraint. SMEs typically possess incomplete knowledge of alternative and complementary sources of finance.
TheCityUK has called for the establishment of National Credit Registers to make available information on the creditworthiness of SMEs and allow access to those registers across the EU on multiple occasions, including in our recent publications Long-term Finance for Infrastructure and Growth Companies in Europe, Capital Markets for Growing Companies – A Review of the European Listings Regime and in TheCityUK’s 2015 Budget Representation.
We welcome the plan to simplify UK trade support online and to join it up effectively with other government services.
PENSION TAX REFORM
In the July Budget, the Government launched a consultation on the system of pensions tax relief, to gather evidence and views on whether the current system incentivises. The Government confirmed that it will publish its response at Budget 2016. Pensions policy has been subject to myriad changes in recent years and is already highly complex. Further changes that create a fairer and simpler system and one which incentivises saving would be desirable, since long-term savings have the dual benefit of reducing reliance on public expenditure, no small consideration given the Government’s emphasis on fiscal consolidation, and increasing capital available for long-term investment.
TheCityUK’s representation to HM Treasury ahead of this Autumn Statement therefore emphasised the importance of ensuring that the tax system complements other policies to encourage saving rather than detracting from them. The announcement in the July Budget that the Government may move away from the current EET (exempt-exempt-taxed) pension-tax system potentially raises questions about the returns from pensions savings and thus about the incentives provided by the system to savers across different income bands. The Government should, therefore, articulate clearly the various outcomes that may be achieved by changing the pension-tax system and weighing their costs and benefits. For example, a short-term boost to revenues from a TEE (taxed-exempt-exempt) system might come at the cost of disincentivising savers. Moreover, greater confidence in the regulatory and tax framework governing pensions will be a pre-requisite for more long-term saving, and to this end, Government will, when it announces the result of its review of the system, need to convince individual savers that pensions policy will be stable.
Maintaining the attractiveness of the UK should be at the heart of the Government’s agenda. The financial and related professional services sector has long demonstrated a commitment to training and skills development. Professional institutions, for example, have a membership of around 1 million people, of which about one-fifth are from overseas.
Britain faces considerable international competition when it comes to the skills of our workforce. Ensuring that the next generation is equipped with the requisite skills to take up the high-value jobs of the future is a key priority for financial and related professional services firms.
Building a deep pool of talent attracts firms to invest in the UK but must go hand-in-hand with the ability to bring in foreign employees. TheCityUK’s recent research, based on a survey of financial and related professional services employers with a collective total of more than 100,000 staff in London, revealed that nearly 60% of survey respondents reported experiencing shortages of skilled staff. Any worsening of skills shortages risks damaging the UK’s attractiveness relative to other major economies and established and emerging financial centres. In order for the financial and related professional services industry to maintain its competitiveness, it must have a rich talent pool from which to recruit.
The Chancellor set out his plans to spend over £100 billion in infrastructure over the Parliament – updating roads and railways; investing in flood defences, and delivering superfast broadband across the country. He also announced the availability of the £40 billion UK Guarantees Scheme, designed to kick-start crucial infrastructure projects, to March 2021. Guarantees have a role to play in ensuring projects are investable, however the Government must make sure that public funds are used wisely and do not crowd out private resources where they are available for projects. The Autumn Statement’s reaffirmation that the private sector can play a positive role in the delivery of public services, especially infrastructure, is welcome as no other country has the depth of experience as does the UK in the role.
TheCityUK has consistently called for the adoption of a more centralised procurement agency-led approach and asked the Government to de-politicise big infrastructure projects, thereby reducing political risk and project costs so the creation of an Infrastructure and Projects Authority and National Infrastructure Commission are valuable steps to put this into practice.
The establishment of a National Infrastructure Commission working alongside the new authority goes towards meeting a major concern about political risk. The choice of priorities for its first inquiry: the Northern Powerhouse, energy supply and Crossrail 2 have all attracted industry interest and were mentioned in the Statement. The Spending Review and Autumn Statement provides £300 million over the next 5 years for a new Transport Development Fund to cover the next generation of transport infrastructure projects such as Crossrail 2 and initiatives emerging from the Northern Transport Strategy.
The Government will publish a new National Infrastructure Delivery Plan next spring, setting out in detail how it will deliver key projects and programmes over the next five years. This will be the key test. The plan must have a clear prioritisation and a pipeline of investable projects that will, in turn, help to reduce bidding costs and provide cost savings from a stronger system of competitive tendering.
TheCityUK has long emphasised the extent to which financial services drive growth and job creation, both directly and indirectly, across the UK as a whole, not just in London and the South-east; nearly two-thirds of the 2.2m people employed in the UK by the industry work outside London. More than 250,000 people are employed in the financial and professional services industries in the North East and North West of England, and cities like Manchester and Newcastle have particular strengths in areas like banking, mortgage lending, and accounting, management consulting and legal services.
The Government’s stated desire to boost the economic contribution of the UK’s various regions to complement, not detract from, the economic strength of London was matched by infrastructure commitments to the devolved assemblies, the planned new powers for local authorities and initiatives such as the Northern Powerhouse. Elected city mayors, for example, will gain the power to levy a business rates premium for local infrastructure projects – with the support of local business. The experience of Crossrail, where business involvement ensured the project continued after it came under question, was illuminating.
We support the Government’s further commitment today to the development of the Northern Powerhouse, including the creation of the Northern Powerhouse Investment Fund, more funding for Northern Powerhouse trade missions and £7million to fund a Northern Powerhouse Investment Taskforce. The announcement of 26 additional Enterprise Zones is welcome and we look forward to constructive engagement between our industry and the Government on these important projects to help create more jobs and further support regional growth.
The UK’s need for energy security, called for by TheCityUK, was recognised. Questions over capacity and diversity will need to be addressed by the Commission and the new Authority.
ECONOMIC AND COMMERCIAL DIPLOMACY
The Foreign and Commonwealth Office’s budget is to be protected in real terms, recognising that economic and commercial diplomacy delivers economic and national security for the UK. The Statement includes the commitment to strengthen the FCO’s global network, support UK businesses access to global markets and safeguard British citizens overseas. We have long championed the value to the UK’s economic prosperity and security of the Foreign & Commonwealth Office, and the Chancellor’s pledge is both welcome and essential if the UK is to pursue its interests and campaign effectively for more open global trade and investment.
UK Trade & Investment (UKTI) is to be refocused with the goal of making it into a world-class export & investment agency. This presents the opportunity to strengthen the UK’s capacity in international trade and investment promotion.
The Government’s commitment to focus on trade support online - and for UKTI to join up effectively with other government services - fits with policy recommendations set out in TheCityUK’s recent UK SME export report.