How can the Budget help address our investment shortfall?
As the TUC’s Budget Submission set out earlier this week, the UK economy is facing a huge investment shortfall. With (as our most recent Economic Report showed) Government growth forecasts dependent upon investment overtaking consumption as a proportion of GDP by 2016, and a 7.7 per cent annual rise in business investment needed over 2012 if we are even to achieve the lackluster 0.7 per cent annual growth currently forecast by the OBR, our future economic prospects are clearly dependent upon achieving an investment step change.
How might this be achieved?
Firstly, the government needs to reconsider its approach to deficit reduction. With the economy facing an unprecedented programme of spending cuts, a large majority of which are yet to be implemented (IFS analysis has shown that by the end of 2011–12 only 6% of the planned cuts to public service spending will have taken place) reduced government spending is set to have an ongoing negative impact on growth. 270,000 public sector workers have already lost their jobs, millions more have had their pay frozen and job insecurity is rife. Across the economy, unemployment remains over one million higher than was the case before the recession. Tax credit and benefit cuts, combined with the VAT rise, have reduced household incomes and there has been no scope for the Government to provide the stimulus that could help offset weak demand (a result of international commodity prices driving up inflation, global uncertainties and also homegrown problems). The impact: disappointing growth over 2011 which in turn has further depressed business and consumer confidence.
A growing economy, with bright prospects for future demand, is clearly far more conducive to boosting investment than a country facing years of economic stagnation – and it’s within the Government’s scope to review its approach to deficit reduction as a means to secure a stronger economy, increase confidence and make the investment surge more likely.
What else could make a difference?
Recognising the futility of corporation tax cuts would be a good start. These cuts are set to cost the Treasury over £1 billion a year by 2015-16, but with corporate cash piles already at unprecedented levels (as Richard shows in our Economic Report, corporate Britain is currently sitting on reserves equivalent to 50 per cent of GDP – worth over £700 billion) providing further tax breaks to companies who are flush with cash seems more likely to boost their profits than their investment intentions.
On the other hand increasing capital allowances looks like it could be a smart move – as our Budget Submission (and many others, including long-term advocates of such a policy at the EEF) recognises. Why give tax breaks to businesses that just want higher profits when they could be targeted at those that want to invest in our economic future.
Government investment is also facing steep reductions – with public investment set to fall by 46% by 2015. With these reductions likely to be a further drag on growth, and with targeted Government investment having scope to significantly boost our longer-term economic prospects, they appear particularly misguided.
Measures to boost bank lending, particularly for small businesses, also look like a no-brainer. In his recent TUC report, Banking after Vickers, Duncan set out the evidence which strongly suggests that availability of finance is a key issue limiting UK investment levels, making the case for significant banking reform. Detailed work will be needed to consider how comprehensive changes to make the UK’s banking infrastructure increase its lending on non-financial sector firms can be achieved, but with last year’s Project Merlin targets not leading to any significant increase in net lending, an obvious place to start is a stronger lending agreement with the banks. Credit easing, particularly the Business Finance Partnership, could also have some impact – although it will be impossible to tell until more details are available.
In the medium-term the case for a state investment bank, which can channel private sector funds into areas of strategic investment, couldn’t be stronger. The international evidence shows that there is a role for such a public body in helping ensure that credit flows to where it is needed and in ensuring that growth is better ‘balanced’. Such an organisation doesn’t have to take years to set up – the Government is already in the process of setting up a green investment bank. Providing it with borrowing powers from when it starts its operations, which is still scheduled to be later this year, would significantly increase its potential to help tackle the investment shortfall.
And far wider reforms of our corporate governance framework also have a role to play. The TUC has long been concerned that aspects of the UK’s corporate governance system, in particular the relationship between companies and investors, can drive economic short-termism, hampering long-term corporate development as well as long-term investor returns. Changes including amending directors duties to ensure they are charged with promoting the long-term success of the company, rather than prioritising shareholders’ interests as at present, and restricting corporate voting and engagement rights to those with a minimum period of share ownership could start to make a real difference in this area.
Of course investment alone isn’t going to drive the recovery. Consumer spending remains around 70% of GDP, and even small improvements here could have significant economic impacts. But household spending growth on par with past upturns looks unlikely – particularly as real wages continue to fall. This makes our recovery more dependent than in the past on investment playing its part, and Government needs to recognise that such significant change won’t just happen unaided – simply cutting taxes for big business isn’t going to turn our investment culture around.