Louise Cooper offers her advice and yours on how George Osborne can cut the UK deficit and salvage the economy.
George Osborne should take note of the lyrics of this 1983 hit. He needs to tempt businesses to take cash out of their pockets and put it to work in the economy. George, lay heavenly financial morsels in front of CEOs that they cannot resist. Because with the trend rate of growth for the UK economy approaching zero, “we can’t keep on living like this”.
Chancellor Osborne will be putting the finishing touches to his budget this weekend. Ministers will be badgering him for cash, but as the purse keeper of a deeply indebted state, he is never going to win any popularity contests.
Most predict this will be a slightly boring, steady-as-she-goes budget. Last year’s fiasco on taxing Cornish pasties (a meat and pastry delicacy from the South West of England for the American readers) will ensure that. But he needs to become a tempter, the male version of temptress.
“Keep Climbing Higher and Higher” – summaries the debt picture of the UK, which is getting worse as GDP disappoints. Thus the government has few options fiscally.
“It’s just the high cost of living” Britons are heavily indebted, with wages rising slower than inflation. Therefore relying on consumer spending is misguided. However businesses have cash. Osborne needs to concentrate on inducing them to spend it. Lay out the bait, Chancellor, entrap CEOs into doing your job – boosting the economy.
So what do I think he should do?
- Cut National Insurance completely for any new employee in the next 1-2 years for all small and medium sized businesses – tempt them to hire. Make it easier too – get rid of as much red tape as the EU allows.
- Secondly entice businesses to buy the new IT system, to expand production, to upgrade their website. Whatever project they have been postponing, make it so attractive to invest, they can’t help themselves. For two years, allow all new investments to be written off 100% against tax – that should cause Finance Directors to salivate. It may be costly but it will force firms to spend money jolting the economy off life support. Financial markets will be reassured that it is a short term measure.
You can take it or leave it
All Chancellors get besieged with budget advice, whether followed or not. I choose to ask Twitterers:
@AndrewDowson “fixing the roads would have many benefits”
Infrastructure spending is a good idea given the state of the UK’s road and rail network and produces long term benefits, boosting productivity if well chosen. However UK pension fund restrictions on asset liability matching and liquidity regulations, may prevent them investing in such projects. Risible given many overseas sovereign wealth funds seem keen and pension funds are desperate for yield.
@Shireblogger “re-boot banks, increase real incomes, mass Prozac helicopter drop”.
The amount of corporate insolvencies is at exceedingly low levels suggesting zombie companies propped up by zombie banks. Both Mark Carney and Mervyn King have both stressed the need to recapitalise weak banks but this is highly unpopular politically.
@PaddyBriggs “.. the elephant in the room is inflation. Over history governments have inflated their way out of difficulties and deficits.. it must be tempting”
In one of the few leaks ahead of this budget, the Bank of England is expected be given a more flexible inflation target although we are a long way away from helicopter money. Markets and Britons are expecting higher inflation in the years to come.
@connarmcbain “scrap the green agenda, invest in shale and slash taxes”
The desire to make the energy production of this country greener is causing energy bills to increase. Reversing this would put more cash into household budgets and reduce inflation. But given Cameron’s promises, such a U-turn is tough politically and bad for the industrial relations. On shale gas, it is becoming increasingly clear that American businesses are benefitting significantly from lower energy costs. We should be doing the same for British business.
@GeorgesJDanton “Stop deluding ourselves that we are actively lowering the deficit and acceptance of fiscal reality please”
Politicians of every hue succumb to the temptation of obfuscating the debt picture during troubled times. Osborne has already started along this path in his December Autumn Statement. Expect more.
Trouble is coming
Patience is needed for the UK’s economy to recover from the seismic shock of the financial crisis. The Chancellor is constrained on almost every side; financially thanks to the huge amounts of debt; politically partly because of the coalition, and partly because some of the things that need to be done – like recapitalising banks are deeply unpopular; on supply side reforms thanks to European laws. But more of the same is clearly not working. He lacks a vision of the economy he wishes to create. He needs to be bolder, although I doubt he will be.
There are some nightmare scenarios that can be painted for the UK and Sterling weakness is an indication that some of them are already weighing on investor’s minds.
For an economy with a demand problem, Temptation is the ideal song choice.
Come on George lead us into “Temptation”.
