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SPROULE James

James Sproule is Chief Economist at the Institute of Directors.

It may not be fashionable to feel sorry for politicians, but I imagine Philip Hammond will have been hoping for a slightly more stable backdrop to his first major set-piece as Chancellor of the Exchequer. There are many things that are beyond the control of the UK government at the moment, not least the precise outcome of Brexit negotiations and Donald Trump’s international trade policy. But one area that is in their gift is domestic policy, and this is still a powerful tool.

So let’s look at the situation as things stand. The economy grew by a respectable 0.5 per cent in the third quarter, with a total of 2.3 per cent for the preceding 12 months. As the Bank of England (whose initial predictions proved too pessimistic) said in its recent Inflation Report, “near-term outlook for activity is stronger than expected three months ago”. As such, there are no immediate grounds to look for a massive government spending splurge at the Autumn Statement. That said, there are some signs that business confidence, which had been improving over the summer, has started to falter in recent weeks. This should firm up the Chancellor’s desire to announce some business-friendly measures when he steps up the dispatch box next week.

Since July, the IoD has run a monthly survey tracking the optimism of our members. Starting with the positive, companies have shown themselves to be resilient in the face of uncertainty. In each of the three surveys, conducted in July, September and October, more business leaders have felt optimistic than pessimistic about how their organisations will perform in the next 12 months. In our latest survey, from October, we have positive figures for IoD members’ expectations for revenues, profitability and employment.

However, the picture for the wider economy is no quite so rosy. In July, shortly after the Brexit vote, we recorded a net figure for outlook of minus eight per cent, showing pessimism had the upper hand. Whatever the long-term effect of leaving the EU – the IoD will certainly support the Government in every way possible to make a success of it – it clearly came as a shock to many businesses. Obeying the political law that nothing is ever as good or bad as it first seems, optimism bounced back in September to a net figure of +15 per cent, with only five per cent of our members saying they were feeling ‘very pessimistic’ for the economy. But after this gain, it was disappointing to see in October that optimism had reversed sharply, falling to a net -20 per cent.

Why does this matter? After all, these are uncertain times and we can expect business confidence indicators to bounce around a bit. Simply put, confidence affects decision-making. Perhaps the single most important figure from our surveys is on investment, which, by a small margin, IoD members expect to be lower over the next 12 months. This should worry ministers, not just because if businesses sit on their hands for too long we might see economic momentum slowing, but also because investing in new technology is key to making the most of the information revolution and raising the level of productivity – the amount produced for each hour worked. This leads to our first, and very straightforward, suggestion for the Autumn Statement: increase the Annual Investment Allowance from its current £200,000 to £1 million.

The AIA allows small and medium-sized business to offset investment in equipment and machinery against their taxable profits. It’s a very direct way for the Government to encourage companies to invest for the future. We have good grounds to think it would be effective, with a quarter of members saying the move would make them more likely to invest over the next 12 months – a very significant result for one policy. Without lots of fiscal wiggle-room, the Government has to focus on reforms which will change business behaviour, and this would be top of our list. AIA, set at £1 million, also has the benefit of targeting the smaller end of the business spectrum, where the majority of companies are to be found, while it won’t make much difference to multinationals.

The Government is understandably concerned that productivity growth has been slow over recent years, but in the modern economy, where growth will be more dependent on application of knowledge and data, rather than squeezing efficiency out of production lines, we also have to focus on the agility of businesses. There are lots of reasons to be positive about the UK as a place for innovative growing companies – we place above the US in the World Bank’s ease of doing business rankings – but the Government could do more to drive investment to entrepreneurial firms. We urge the Chancellor to reform the Enterprise Investment and Seed Enterprise Investment Schemes to increase equity investment in the exciting and creative companies which will drive our future success.

Much attention has been focussed on infrastructure as way to boost the economy, but in terms of major projects, we know now that the Government is committed to both HS2 and a third runway at Heathrow. Both will take quite a while to deliver, so in the short term we would like an emphasis on ‘frugal infrastructure’. For example, while Heathrow and Gatwick are both at capacity, there is still room at Stansted, so a sensible move would be to announce a consultation on faster train links to that airport, and to link it with the tech hub of Cambridge.

Business leaders across the country will tell you that steady improvement to road and rail links are always needed, but the one single area which could be really transformative is broadband. We know from our members that they feel the faster and more reliable internet would not only increase productivity, but would also allow them to offer more flexible working to staff. The Government has a target to give all households access to speeds of ten megabits per second by 2020, but that isn’t actually very impressive by international standards (South Korea already averages 30mbps and Estonia over 45), so we’ve called for a much more ambitious target of ten gigabits, albeit with a longer timeframe of 2030.

The Chancellor has indicated he is not a politician who is interested in gimmicks, and we certainly hope that his tenure is characterised by a willingness to undertake long-lasting reform. Top of this agenda is finding a replacement for corporation tax, which is increasingly unsuitable for taxing multinationals, and does not take proper account of where business activity takes place. If Hammond announces targeted investment-boosting measures, while plotting a way forward for more systemic reform, businesses will be pleased to see we have a steady hand on the tiller.

9 comments for: James Sproule: Hammond must use the Autumn Statement to bolster faltering business confidence

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