By Lea Pachta

Government should set out clear and timely plan for restoring fiscal credibility and nurturing growth

The CBI is urging the Government to use its last Budget before the election to set out more details of spending plans for government departments in order to boost confidence in the UK’s public finances and provide economic stability.

In a letter to Chancellor Alistair Darling, Richard Lambert, the CBI’s Director-General, spells out two critical objectives for the Budget: boosting the UK’s fiscal credibility and fostering economic growth.

The CBI says that delivering a detailed and credible plan for balancing the books by 2015-16, two years earlier than planned, is the key to addressing concerns about the UK’s public finances and its AAA debt rating. An earlier date for budget balance should be achieved through a combination of lower overall spending and public service reform, rather than resorting to damaging tax rises at time when the economy is still fragile.

The Budget must also include measures to nurture economic growth by supporting businesses and entrepreneurs, including reversing the planned rise in employers’ National Insurance Contributions, which amounts to a tax on jobs.

Mr Lambert said:

“This Budget comes at a pivotal moment for the UK economy. Investors are clearly jittery about sovereign debt, but are prepared to give the UK the benefit of the doubt until after the election.

“The UK’s deficit, though worryingly large, is still manageable, but the Government must act now to set out a convincing, credible pathway for balancing the books. It is critical that this Budget provides credibility and direction on the public finances, and creates the right conditions for businesses to drive economic growth.”

Enhancing fiscal credibility

Looking at the CBI’s proposals to enhance fiscal credibility in more detail, the business group is calling for:
The Budget to be balanced by 2015-16, two years earlier than currently planned, to instill market confidence in the UK’s public finances.

A more detailed plan for public spending with a lower trajectory for overall spending. This should focus on public sector current spending cuts, rather than tax increases or cuts to capital spending.

Public sector productivity to be raised by re-engineering the way public services are delivered and inefficiencies in supply chains, procurement and workforce management to be addressed. Spending public money more smartly could generate savings of more than £130bn by 2015-16.

Commenting on the proposals to enhance fiscal credibility, Ian McCafferty, the CBI’s Chief Economic Adviser, said:

“The Government should aim to balance the books sooner than it currently plans. A target date of 2015-16 for restoring budget balance would send a powerful message to investors about the seriousness with which the UK is tackling the public finances. This medium-term target is much more important for credibility than the exact start date for action.

“However, in our view, fiscal balance should be achieved by curbing spending rather than increasing taxes, and cutting current rather than capital spending. This balance of measures is the most supportive of growth, but will mean grappling with thorny issues such as poor public sector productivity, pay and pensions.

“As well as setting out a more challenging target for the pace of reduction in public borrowing, we would also like to see full details of exactly how the fiscal austerity ahead will translate to departmental budgets.”

Fostering the economic recovery

Looking at the CBI’s proposals to foster economic growth in more detail, the business group says the Budget should concentrate on reducing obstacles to growth, investment and employment, and nurturing entrepreneurship and competiveness. That is why it is calling on the Chancellor to reverse the planned rise in employer National Insurance Contributions by 1 percentage point from April 2011, as well as introducing other low-cost measures to help small and medium-sized firms access the capital they need.

Mr Lambert added:

“With the public sector about to be squeezed, it will be up to business to take up the slack and deliver the growth needed to get the economy back on track.

“The Budget should do whatever is necessary and possible to maintain and strengthen this country’s reputation as an attractive place for investment. The planned rise in National Insurance Contributions is particularly ill-judged. It is a direct tax on jobs and should be reversed.”

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