TheCityUK Autumn Statement Analysis 2014

Defying external headwinds, the Chancellor today presented an Autumn Statement notable for its economic optimism.

 The UK economy is expected to register strong growth this year and next. The OBR today revised upwards its forecasts for real GDP growth to 3% in 2014 and 2.4% in 2015, from 2.7% and 2.3% respectively in its March forecast. This would make the UK the fastest-growing economy in the G7, and ensure that that UK’s economy would grow at more than twice the rate of the eurozone’s*.

The positive outlook for growth was matched by optimism about the public finances. Although tax revenue collections have been lower than anticipated, lower welfare payments owing to falling inflation have helped support the overall fiscal position. In combination with spending cuts and lower debt-interest payments, this supports the OBR’s forecast of a steady reduction in the fiscal deficit as a percentage of GDP over the next five years. 

Nevertheless, the OBR’s confirmation that public-sector net borrowing is not falling as fast as anticipated, and that the debt-to-GDP ratio remains relatively high and is set to peak only in 2015, demonstrates the continued need for fiscal consolidation. In his final Autumn Statement before the 2015 General Election, the Chancellor therefore underscored the need for a longer-than-anticipated period of restrained public spending. The new Charter for Budget Responsibility, which will be put to vote in January, would reinforce the commitment to continued improvement in the public finance over the next five years. A strong macroeconomic environment provides the foundation for investment, growth and job creation – a virtuous cycle in which the financial sector plays a crucial role. 

The Autumn Statement came on the heels of yesterday’s launch of the new National Infrastructure Plan. TheCityUK believes the new Plan is an opportune reminder of the potential investment opportunities within the UK, and is very pleased with the Plan’s recognition of the value of regulatory coherence. In addition, TheCityUK has previously emphasised the need for a detailed time-frame and delivery plan for the “top 40” infrastructure projects, so the Plan’s emphasis in this regard was particularly welcome. A well-defined pipeline of projects would help create cost savings from competitive tendering, and providing greater clarity on these projects would help to reduce the political risk that deters many private investors. 

The Chancellor’s commitment to investment in rail networks in the North of England is very positive. 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 70% of the two million people employed in the UK by the industry work outside of London. Because of this, TheCityUK strongly welcomes the Chancellor’s emphasis on regional investment and effort to create a “Northern Powerhouse”. 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, accounting, management consulting and legal services.

Looking further afield, to Europe, the Chancellor stated that the UK’s net payments to the EU would fall this year, and over the next six years. TheCityUK believes that the City’s position as Europe’s financial centre and main capital market is a crucial asset that benefits the whole of the EU, including the UK. We therefore support the membership of the UK in a reformed EU. Absent reform – which we envision as a dynamic, ongoing process – we believe the EU risks becoming increasingly uncompetitive. We advocate structural and institutional reform to emphasise the principle of subsidiarity and to ensure a renewed focus on the Single Market. Our research indicates that the economic rationale for the UK’s continued membership in a reformed Union is robust, and that any of the alternatives to full membership would undermine the economic interests of both the UK and the other Member States. 

Policies announced to bolster business lending were, in the aggregate, a centrepiece of the Statement. Among the key announcements were a one-year extension of the Funding for Lending Scheme, the allocation of £400m to the British Business Bank to support venture-capital funding, and a further encouragement of peer-to-peer (P2P) lending. The Statement also promised an extension of tax concessions for small businesses and a review of the business tax rate structure – all of which will help UK businesses, and particularly small business, thrive.

TheCityUK’s campaigns for increasing the availability of SME finance and for finding alternatives to bank lending will be recognised in the Finance Bill 2015.  The Bill is set to include provisions, which we will examine with industry experts, to encourage the private placement market by creating a new exemption from withholding tax on interest on qualifying private placements.  It will also include measures to modernise the taxation on corporate debt and derivative contracts. Further steps by the government to remove regulatory barriers for P2P lending will also be brought forward as well as increasing the availability of market information about SMEs through the sharing of credit data. 

TheCityUK’s international competitiveness agenda was again reflected in the Statement.  First, there was the welcome announcement that the government will examine the UK’s regulatory and tax regime to keep the UK as the premier reinsurance provider.   Next, there was the commitment of more resources dedicated to reducing trade barriers with North American and European trading partners.  This is especially welcome if the UK is achieve its aims for the liberalisation of the services industry.  We will examine details of the FCO’s “surge for growth programme” and the measures related to UKTI and UKEF through the optics of increasing the UK’s competitive position.   Lastly, we will ensure our views on the review of the UK’s overseas network reflect the key objectives of making it more efficient and business-orientated. 

Other highlights of the Autumn Statement included:

  • Restructuring Stamp Duty Land Tax
  • Introducing legislation to devolve powers of corporate taxation to Northern Ireland
  • Continuing reforms to the pension sector that address the UK’s demographic challenges and enable individuals to make better choices about their retirement savings

 

Overall, the Chancellor’s Statement is one that is squarely focused on the twin pillars of macroeconomic stability: long-term economic growth and sustainable public finances. TheCityUK believes this focus on fundamentals is highly appropriate, since risks to the economy abound and the strong economic data of recent months cannot be taken as grounds for complacency. Moreover, as positive as the decline in the unemployment rate has been, there is scope for a further reduction in the ranks of the jobless, and this will require sustained strong GDP growth. 

Above all, TheCityUK welcomes the Chancellor’s attention to issues of competitiveness; this includes a focus not only on tax competitiveness, but also on skills and human capital. A skilled workforce is one of the main reasons that London is the world’s pre-eminent financial centre. Among other benefits, increasing international competitiveness will help retain the UK’s ability to attract FDI inflows in a variety of sectors, including financial services – which has accounted for the lion’s share of FDI inflows since 2007. Foreign investment is positively correlated with economic growth, in part because it is an important driver of job creation. Against a backdrop of ever-increasing global economic competition, it is critical that the UK maintain its competitive advantages, and we believe that this Autumn Statement will help the government to advance that goal.

*The eurozone is forecast to grow by 1.1% in 2014; European Commission, European Economic Forecast Autumn 2014, 4 November 2014