Rishi Sunak says his tax and spending plans, outlined in the budget, will boost the outlook for private sector jobs, wages and growth. The Bank of England’s most recent review of the economy begs to differ.
It might appear that the recovery is strong and that companies can barely keep pace with customer demand. Sadly, appearances can be deceptive. If anything, the archetypal mainstream UK business – the one that stays out of the limelight, doesn’t attend award ceremonies or even bother to join the local chamber of commerce – will continue to look and behave like a zombie, staggering along with the same old equipment and outmoded technology.
These are the firms that kept workers furloughed up to the last day of the government’s job subsidy scheme in September before deciding whether to make them redundant or not. Mostly small in size, they are simultaneously the bedrock of the business community and a drag on innovation in what is now rightly seen as the only worthwhile economic utility – green growth.
Sunak spent much of the budget talking up the rebound from Covid and promising to deliver an economy built on research and development with the practical benefit for workers of higher productivity and higher wages in years to come.
This reward for voting Tory and backing Brexit will also, Tory strategists believe, keep people voting Conservative at the next election and ease their growing fears that hard Brexit was a major mistake that will damage the economy.
Yet looking ahead to 2023 and 2024, when Covid is expected to be no more than a mild irritant, the UK’s forecasts for business investment and GDP growth are among the lowest in the developed world.
According to the Bank of England’s latest predictions, business investment will jump next year by 17%, to make up for a 13% fall over 2020 and 2021. In 2023, business investment growth falls to 1% and in 2024, the presumed year of the next election, it goes into reverse, tumbling by 4%.
Much of the initial rise can be attributed to Sunak’s “super deduction” on private sector investment, offering 30% tax relief against purchases of new equipment. Due to run out in 2023, it sought to encourage a rush of spending that would bring momentum to his plan for investment in a more innovative, high-skill economy.
According to Sunak’s supporters, he was strapping rocket boosters to the side of the economy. A more accurate image might be a sparkler borrowed from one of this weekend’s Bonfire Night revellers: GDP growth will slump back to 1.5% in 2023 and 1% in 2024, according to the Bank of England.
The Office for Budget Responsibility, the Treasury’s independent forecaster, agrees with the Bank that investment will rise next year before falling into negative territory at -1% in 2024. The British Chambers of Commerce (BCC) says its members think the super deduction policy is a dud and the rate of growth will peak at 6.5% next year before falling, though not quite below zero.
Some business leaders are also concerned that the hike in corporation tax from 19% to 25% in 2023 will play an important role in deterring investment.
The BCC’s chief economist, Suren Thiru, says the continuation of a decade or more of low investment is probably connected to the uncertainty surrounding so many of the government’s economic plans, from “levelling up” the regions to reforming business rates. There are statements of intent from ministers about the need for change, he says, but no one has a clue as to how these plans will be implemented.
In aggregate, businesses have more cash in reserve than they did when the pandemic started, but there is a huge divide between large firms that found their goods in high demand over the past 18 months and those that have suffered shock after shock – first lockdowns, then labour shortages and more recently the prospect of spiralling inflation.
Which brings us back to the long tail of indebted zombie firms that the Bank of England’s former chief economist, Andy Haldane, said went some way to explaining the UK’s long-running productivity gap with the rest of the developed world.
This type of firm probably won’t go bust. And it may provide a generous income for its owners. But there are no mega pay rises for workers on offer here, if only because these firms don’t think they can afford to innovate more than is absolutely necessary to stay in business.
They will answer the jobs-shortage question by not doing so much work, or by asking customers to delay their plans – building up backlogs, which is what we see in the data at the moment. The only compensation for workers at these firms is cheap credit – which goes some way to explaining why the Bank of England has yet to find a good time to raise interest rates.