Category Archives: Economic

Britain, Business, Economic, Government, Politics, Society

Budget 2018: ‘A shot in the arm’ for British businesses

BUDGET

BUSINESS leaders have welcomed a shot in the arm for the British economy following the Chancellor’s pro-enterprise Budget.

In the final Budget before Brexit, Philip Hammond announced a raft of fresh tax reliefs and spending pledges to help solve the UK’s ongoing productivity problem.

The plan included extra funding for research and development “to secure the UK’s position as a world leader in new and emerging technologies such as artificial intelligence, nuclear fusion and quantum computing”.

Seeking to exploit concerns about how the economy would operate under a Labour government, the Chancellor said: “We will always back enterprise. As we finalise our departure from the EU, we must unleash the investment that will drive our future prosperity.

“So I can announce a package of measures to stimulate business investment and send a message loud and clear to the rest of the world: Britain is open for business.”

Among the policies Mr Hammond announced were:

. An increase in the annual investment allowance (AIA) from £200,000 to £1m for two years, giving extra relief to firms that invest in machinery;

. Tax breaks to encourage businesses to invest more in factories, offices and other places of work;

. £1.6bn for R&D to promote science and tech innovation;

. £50m for artificial intelligence fellowships;

. A two-year freeze on the VAT threshold.

The measures were welcomed by business.

The director general of the British Chambers of Commerce, Adam Marshall, said: “Philip Hammond has sent important and positive signals to businesses across the UK, many of whom have been wavering on investment and hiring.”

On the increase in the AIA, he added: “This will be a huge shot in the arm for businesses across the country, giving many thousands of firms renewed confidence to invest and grow.”

Among the science-friendly measures, the Government will plough £50m in new Turing AI Fellowships to lure artificial intelligence researchers to the UK, £235m to support the development of quantum technologies and increased funding to explore distributed ledger technologies such as blockchain.

Under the Industrial Strategy, total R&D investment is due to hit 2.4pc of GDP by 2027.

One of Mr Hammond’s headline business policies was a change to the Annual Investment Allowance. While business groups were mostly supportive of the move – with the allowance rising from £200,000 to £1m for two years starting in January 2019 – analysts added that firms might choose to delay investment plans to coincide with when the higher rate of relief will come into force.

A real estate tax partner at PwC said: “Longer term, this should encourage much more investment, but short-term there may be a lag while businesses wait for January.”

Entrepreneurs were directly targeted through an extension to the British Business Bank’s start-up loans programme, which will run until 2021, and amendments to a policy called Entrepreneurs’ Relief – which had been in the line to be scrapped.

They pay a lower rate of tax at 10pc, compared with the standard rate of 20pc on capital gains when they sell off some or all of their business assets.

Mr Hammond has now doubled the minimum qualifying period from 12 months to two years and shareholders will now have to hold a 5pc economic stake in the company to receive the relief.

The Chancellor also announced smaller-scale measures, such as £20m of skill-training pilot schemes.

In a Budget that was welcomed for supporting smaller and more risky start-up businesses, the Chancellor said he would help UK pension funds invest in such firms.

The Treasury will consult next year on the pension charges cap, which restricts the amount some pension providers can charge in fees.

Standard
Britain, Economic, Financial Markets, Government, Society

Brexit, oil prices and global trade: factors hindering economic recovery

ECONOMIC

DESPITE the uncertainties surrounding Brexit the range of expectations for UK growth for 2019 is relatively narrow – between 1 per cent and 2 per cent. A recent poll found that no economist expected an outright contraction next year; nor did any expect a boom. Rather, the most likely scenario is for growth of 1.5 per cent, which, the Bank of England believes, is around the UK’s new lower trend rate. The International Monetary Fund (IMF), which has also refreshed its global forecasts, expects roughly this same rate of growth in Britain to persist over the next five years.

The Brexit saga is probably the most obvious risk facing the economy. Whatever one’s view of the longer-term Brexit effect, a “no-deal” outcome could lead to the economy plunging into recession, while a “good deal” could boost confidence, investment and consumer spending and thereby economic growth. But Brexit is far from the only risk in town.

Indeed, there are plenty more global concerns that may yet scupper the recovery. After all, the British economy – unlike the United States and other relatively “closed” economies – is highly dependent on the outlook for global growth. And across much of the world forecasters see growth slowing over the coming years, even without some of the more disastrous risk scenarios crystallising.

What are the key global risks that might come back to bite the UK? First, there’s China. Many think of China as being a source of cheap imports but it is also Britain’s sixth largest goods export market. On one measure, published by the IMF, China overtook the US as the world’s largest economy in 2014, so attempts to reduce its debt pile after many years of spending could present a significant threat to global growth.

Fiscal largesse in the US is boosting growth there, but as President Trump’s splurge comes to an end the economic hangover could spread far beyond its shores. On this side of the Atlantic, the European Commission is likely to complain about the high budget deficits planned by Italy’s populist government, providing another source of market stress. Then there’s the issue of protectionism. Global tariffs have fallen significantly since the interwar period and remain low even after recent increases between the US and the EU/China. Even if these moves do not directly affect Britain, an escalation in trade disputes could yet be the precursor to weaker global confidence and exports, both to the UK’s detriment.

Oil prices could become a destabilising global force. Prices have fallen a little over the past few weeks but remain high at above $80 per barrel. Had strong global demand been the cause, that might have provided a counterbalance. But when prices rise because of supply constraints net oil importers such as the UK suffer increased costs with no improvement in demand conditions.

Higher energy prices also tend to leak into general price inflation. For now the inflation genie remains in the bottle, with rates of inflation across the G7 in a tight 1 per cent to 3 per cent range. But past above-trend rates of economic growth alongside unemployment rates at their lowest in a generation suggest upside risks to inflation. If not met with rising wages, that would reduce household spending power and could also prompt central banks to raise interest rates more quickly. Not only does that directly curtail domestic spending but for those countries that have taken out foreign currency loans (such as Turkey or Argentina) rising global interest rates push up their repayments and the risk of more widespread emerging market panic.

Recent moves in equity prices reflect all of these concerns; the FTSE 100 index fell to below 7,000 to a six-month low earlier this month. Investor concerns relate to the fact that neither central banks nor government exchequers can be sure their armoury is sufficient to deal with another crisis, should one arise. Banks may be more resilient now but they may not be the source of the next economic downturn.

Brexit is one of many global concerns that have increased the risks of another downturn in Britain and beyond. These risks will require careful navigation by policymakers if another downturn is to be avoided.

Standard
Britain, Economic, European Union, Government, Ireland, Politics, Society

Brexit always leads back to the issue of the Irish border

BREXIT: UK – IRELAND

ONE of the most persistent myths about Brexit is that the Irish border issue was bounced on to an unsuspecting British prime minister by her cunning – or, perhaps, reckless – Irish counterpart. According to this narrative, Theresa May signed up to the December 2017 agreement that committed the UK to avoiding a hard border on the island of Ireland without fully understanding the implications because she was desperate for a transition deal.

Yet, what has become clear since is that the necessity of avoiding a hard border on the island of Ireland matters as much to Theresa May as it does to Leo Varadkar. Just as no Irish prime minister could ever agree to the renewed partition of the island, Mrs May remains determined not to be the British prime minister who presided over the restarting of the Troubles, still less the disintegration of the United Kingdom.

The British government may have been slow – some might say shamefully slow – to appreciate what was at stake, but it is the Irish border issue, rather than the demands of business, that now drives Mrs May’s entire Brexit policy, as expressed in her Chequers proposal.

But the fact that Mrs May is no less sincere than Mr Varadkar in her desire to keep the border open doesn’t make a solution any easier.

As things stand, the Irish border is the single biggest obstacle to an orderly Brexit and the two sides are as far apart as ever. EU officials say that no progress whatsoever has been made since March in negotiations over the backstop that Mrs May agreed in December. The withdrawal agreement was to ensure that no hard border emerged regardless of the future trading relationship between the UK and EU.

The EU insists that there can be no withdrawal agreement without a functioning backstop. The UK is adamant, however, that the problem can be solved only via a framework trading relationship that makes a backstop unnecessary. Hence the Chequers plan for a “facilitated customs arrangement”, which would see the UK pursue a dual-tariff system, collecting EU tariffs on the EU’s behalf for imported goods for the EU market, but charging only UK tariffs on goods destined for the UK market; and a proposed “common rule book” covering trade but not services.

Neither side shows the slightest sign of budging. Mrs May continues to insist that the EU’s backstop suggestion would amount to introducing a border in the Irish Sea, which she says no UK prime minister could accept. Downing Street believes that Brussels is badly underestimating the degree of cross-party support for its position. Officials note that an amendment to the EU Withdrawal Bill tabled by Jacob Rees-Mogg ruling out a customs border in the Irish Sea was accepted by the House of Commons without a vote. Downing Street argues that the only way to unblock the situation is for Brussels to drop its opposition to Chequers.

EU officials have countered and have said Mrs May is underestimating opposition to her proposals across the European Union. Brussels is also baffled by the UK’s position on the backstop. EU officials have pointed out that some checks already take place at Northern Irish ports and airports and that the EU’s proposal simply would build upon them. Indeed, civil servants in Northern Ireland produced a draft paper this year in what they dubbed a “Channels” approach, under which goods entering Northern Ireland from the UK could pass through either a red or green channel at ports or airports depending on whether those goods were destined for local consumption or export to the EU. Such a system would depend on some level of risk-based checks combined with appropriate documentation, cross-border cooperation and tough penalties for infringements. The paper concludes that such “a pragmatic extension of present reality . . . seems infinitely preferable to a return to the border of the past”. Yet the UK government has blocked publication and refuses to share with Brussels any underlying data on volumes of goods entering Northern Ireland.

Of course, how this situation plays out will in part be determined by how all sides perceive the consequences of a no deal. Both the UK and Ireland would be hit hard economically. The IMF estimates that both would suffer similar hits to GDP of about 4 per cent by 2030, although Ireland’s far higher rates of growth would make such a shock easier to absorb. British officials believe that Mr Varadkar would pay a political price because he has done little to prepare public opinion for the prospect of the EU at some point obliging Dublin to start introducing customs and regulatory checks at the Northern Irish border, something Britain has said it would not do. But while Dublin is convinced it would win any blame game, the bigger risk may be to the UK. After all, the case for allowing the people of Northern Ireland to decide their own fate before any border checks were imposed and as provided for under the Good Friday Agreement would surely be strong. A recent poll published earlier this month suggested that a majority of Northern Irish under such circumstances would vote for reunification by a margin of 52 per cent to 39 per cent.

The risk for Mrs May is that the very outcome that her entire Brexit policy has been seeking to avoid will have come to pass. A political paradox if there ever was one.

Standard