Focus for sterling will switch momentarily from monetary moves to fiscal policy this Wednesday, as Chancellor Phillip Hammond delivers the Budget, says economist.
"As has been the case for nearly every Budget since the advent of the Global Financial Crisis, there is little wiggle room for the Chancellor to make a political giveaway in today's Autumn Budget, says Jeremy Cook, Chief Economist at WorldFirst.
Brexit will feature heavily of course, although the Chancellor has said that actual provisions for spending necessary under a so-called ‘Hard Brexit’ will not feature; businesses may have to start thinking about contingencies soon but Government is not playing that game yet.
Typically sterling has paid little mind to the Budget, with traders insulated from fiscal levers by a duvet of QE spending, low growth expectations and benign political spending. This Wednesday’s release will see investors focus on signs of Brexit preparedness, political fatigue, changes to borrowing guidelines and how the government plans to drive investment.
That being said there are three things that we think the government could do to benefit SMEs this Wednesday:
Tax cuts on Investment
Until 2015, companies were able to get tax relief on £500,000 of new spending on factory or capital infrastructure. That figure now sits at £200,000. As we have said hundreds of times since the Brexit vote, the decision to leave the EU will live and die via trade and investment, and taxing investment more harshly now than before the vote seems contrary to the image that UK PLC should be putting out there at the moment. A return to the old allowance should be done at a minimum, although we would prefer a new threshold of £1m. Such a measure could be tied to the jobs market by allowing higher investment allowances to be eligible to companies who also employ apprentices.
Infrastructure, infrastructure, infrastructure
Part of the landscape of the UK labour market at the moment is high employment, stagnant wages and low productivity. Issues around Solvency II rules and businesses therefore needing to hold increased amounts of cash on their balance sheets, as opposed to putting them to work, has blunted productivity throughout the Global Financial Crisis. This is not just a UK issue, but one that affects almost every developed nation at the moment.
Public money guarantees for private investment in infrastructure spending is the closest thing we have to a silver bullet to the productivity crisis, and would limit the slow creep of the UK’s national assets – airports, ports, roads, water systems – being owned by foreign governments and infrastructure funds.
Back the regions
We don’t need more money in London or the South East; these are not the areas wherein the full effects of Brexit will be truly felt. Ironically, those areas of the UK that voted for Brexit are likely to be hit hardest from lower employment, lower growth and a widening wealth gap. Funding that benefited whole industries like agriculture and supported towns like Grimsby and Bradford is going to be cut, and while this may be a job for the Treasury’s Brexit preparedness teams, the Budget could easily be a prime opportunity for the government to announce spending plans in the North that aim to in some way replace the EU funding we voted to forego.
In summary, Budgets are imprecise instruments that a Chancellor can use to murmur around the edges of the UK economy. SMEs are not the periphery of the UK economy but the spine, and these measures could help secure them in this uncertain post-Brexit environment.