Consultant economist Kevin Butler, former South West agent for the Bank of England, gives his assessment of George Osborne’s fourth Budget:
PERHAPS a bit unfair on a Chancellor who has so little leeway to make major changes in the long road back to fiscal rectitude, but the fact is that, for the Exeter city region and the South West more generally, very little will change.
Exeter has a lot going for it and that’s clearly the story that incoming firms like John Lewis and Ikea want to be part of. “Location, location, location” applies to firms’ investment decisions as well as to home purchase; and there is huge spin off (what economists call the multiplier effect) from major new or continuing investment by the university, the Science Park, Skypark, the massive Cranbrook project and others.
George’s views on the economy (or rather the views of the grandiosely named Office for Budgetary Responsibility – with a name like that they can’t be too far wrong!) are that output will continue to limp along, pretty much as it has done for the last 18 months, and this will mean less tax revenue for the Exchequer to balance the continuing high levels of expenditure.
So getting the deficit down to manageable levels and stopping the inexorable climb of the debt mountain (as a percentage of the economy) is pushed out to 2017/18 or even beyond.
We will continue to borrow some £120bn for the next two financial years – broadly the amount we have borrowed, after adjusting for special factors, in the financial year about to close. But a “triple dip” this year is not the most probable scenario, despite the recent renewed turbulence in the Eurozone, and we should take comfort from that.
So are there any nuggets for firms and households in the South West and the Exeter city region in particular?
Well, in no particular order...
Freezing fuel duty helps a bit given the greater average distances we in the South West tend to drive – though (sorry this is a red rag to the big beasts!) switching to much more fuel efficient vehicles, like my British-made diesel Mini, would help us to save much more at the pumps than the Chancellor’s turning off the fuel price escalator.
The house buying incentives (Help to Buy and mortgage guarantee) might also make a bit of difference for South West home buyers – including those interested in Cranbrook.
Easier deposits and low interest rates will help young and not-so-young buyers of new homes. The Bank of England’s Funding for Lending scheme has already helped mortgage availability and price, though Funding for Lending is less helpful for savers who have borne the brunt of low interest rates since the start of the recession.
But bringing forward the 10 per cent personal allowance will help lower earners in particular, who have had their incomes squeezed by low wage increases and inflation that has been persistently above the Chancellor’s target.
Small firms, who make up a much larger proportion of the South West peninsula’s business activity than some other regions (particularly London and the South East), will benefit from the cut in employer’s National Insurance and this should be positive for further employment creation.
Corporation tax at 20 per cent from 2015 is also a step forward, continuing the programme of reductions that is already under way. But we do need to see more capital investment by firms – the seed corn of our longer term growth prospects.
Tight credit has held investment back for some firms; others have been content to build up cash until the economic clouds appear to be clearing rather than just giving occasional glimpses of the sun.
Funding for Lending hasn’t done much to help yet. The case for a public/private investment bank, which I argued last autumn would help small, entrepreneurial and innovative firms, is still seemingly in the pending tray. But a bit more public project funding – £15bn extra, spent over several years, is only about one per cent of one year’s economic output – is better than nothing. For Devon and Somerset it has much less impact than the spin-off from the giant Hinkley Point project that will be taking shape for many years to come.
But the wealth that pays for our public services – healthcare, education, security and a host of other things – is created by the private sector and the Chancellor’s limited scope for manoeuvre is at least on the right compass bearing. Creating the right environment for innovation, capital investment and private employment growth will enable Exeter’s business sector to focus on creating and supplying value to customers.
Will possible changes to the Bank of England’s remit help hard pressed households and firms in Exeter and the South West? This all seems rather remote from our local experience. But, actually, finding new ways of boosting bank lending, while ensuring banks are prudently managed, and keeping the cost of living stable while trying to pump up growth, is fundamental to people keeping heads above water through this unprecedented economic storm.
What we do know is that Governor Carney will take the baton from Governor King in the summer and that he, like his predecessor, will do all in his power to avoid knocking the fragile “zig zag” economic recovery off track.