By Maximilian Clarke

The Confederation of British Industry (CBI) is urging Chancellor George Osborne to stick to the current deficit reduction plan in his autumn statement, but with an increased focus on promoting growth.

“The Government must stick to its plans to bring down the deficit to maintain confidence in the UK’s public finances and keep the cost of borrowing down, but now is the time to revitalise its growth strategy and create a “Plan A plus”.

Continued uncertainty in the Eurozone, and the resulting weaker prospects for exports and investment have led to a marked drop in business and consumer confidence, and as a result the CBI has revised down its forecast for the UK economy.

The UK’s leading business group now expects GDP growth to be 0.9% in 2011 and 1.2% in 2012, down from 1.3% and 2.2% respectively.

However, the CBI believes that weak economic performance and growing fiscal instability in the Eurozone make it even more important that the Government safeguards the UK’s AAA credit rating. It is also publishing its proposals to the Chancellor ahead of the autumn statement on 29 November, designed to boost growth and raise confidence.

“In uncertain economic times, confidence falters, investment grinds to a halt and job opportunities fade. This package of measures taken together could make a real difference to the economy, creating jobs and boosting growth in the years ahead.”

In its latest quarterly economic forecast, the CBI predicts that unemployment will continue rising next year, peaking at 2.75m in Q4 2012.

Inflation is expected to fall back from Q1 2012 onwards, as this year’s VAT rise drops out of the equation, reaching the Bank’s target rate of 2.0% in Q1 2013.

Given the weaker prospects for domestic growth, the CBI expects interest rates will remain at their historic low of 0.5% throughout 2012, and start edging upwards only from 2013.

Weaker UK growth and the ongoing Eurozone turmoil have dented business confidence and, despite a cash surplus in the corporate sector, firms’ investment plans are being pared back. Total business investment is expected to grow by just 0.6% in 2011, down from 3.7% in the previous forecast, and 6.9% in 2012, down from 9.3%.

The CBI forecasts quarter-on-quarter GDP growth to be 0.0% in Q4 2011 and 0.2% in Q1 of 2012.

Ian McCafferty, the CBI's Chief Economic Adviser, added:

“The recent turbulence in the Eurozone has seriously dented business confidence, which has led to a reappraisal of investment and export prospects.

“Survey evidence points to economic growth having stalled in coming months, resulting in a significantly weaker outlook for the year ahead. We expect UK GDP growth to be flat in the fourth quarter and rise only very slightly in the first quarter of 2012.

“We still think we can avoid a double dip, but the risks have increased.”

Ahead of the autumn statement the CBI is urging the Government to consider a range of measures to help kick-start growth, at little extra cost to the Exchequer.

Its proposals range from actions to boost investment in infrastructure, stimulate the housing market and improve the roads, to supporting energy intensive industries, reforming the electricity markets and tackling youth unemployment.

The CBI’s proposals for “Plan A plus

The major priority is to make the decisions required to attract £200 billion of vital private sector investment into our infrastructure in the next five years. Ten specific public sector infrastructure projects can also be brought forward at no extra cost, creating jobs and improving the roads in the short-term.
On infrastructure, the CBI proposes:

· Two road-tolling projects financed by the private sector — widening the A14 from Rugby to Felixstowe and improving the A1 in the North East.
· Bringing ten publicly-funded road projects forward within the existing spending programme, to get shovels in the ground and ease congestion in transport networks. These include projects on the M25, M1 and M60.
· Re-instating a further 14 major road projects delayed in the 2010 spending review to fill the gap created in the pipeline from 2013, analysing whether or not private sector investment could be used. These include projects on the M1, M6 and A38. A full list is attached.
· Making infrastructure investment decisions more attractive by taking actions which do not add to the public purse. These include simplifying the planning regime, standing firm on the National Planning Policy Framework to unblock local investment, and simplifying the process for major infrastructure projects.Providing clarity to encourage investment in energy infrastructure on Electricity Market Reform, the Renewables Obligation and National Grid projects.

The CBI proposes three further ways the Government can help boost growth in the near term, which taken together would cost no more than £500 million a year:

· Preventing the exodus of the UK’s energy-intensive industries by giving a rebate to users on the carbon floor price. Companies in sectors such as steel, aluminium and chemicals are vital to shifting to a low-carbon economy and are already being hit by rising energy prices and slower demand. The CBI proposes targeting companies most at risk with a rebate, at an estimated cost of £300 to £400 million in 2013, and £600 to £700 million in 2015.
· Stimulating the housing market by underwriting mortgage indemnity guarantees, reducing the risk of higher loan-to-value mortgages to buyers and lenders. This would help rebuild the first time buyer market, with knock-ons for the whole housing market, and be provided on a risk-sharing basis by mortgage providers and house builders. There could be a role for the Government in providing tail risk guarantees.
· Targeting measures on tackling youth unemployment, including a Young Britain Credit worth £1500 for firms taking on an unemployed person aged between 16 and 24 years, which would cover the first year's National Insurance for employers. This would cost £150 million a year, which is affordable within the context of the Government's deficit reduction plans. Freezing youth rates of the National Minimum Wage would also prevent the young and inexperienced from being priced out of the labour market.
Further measures to support growth should also be considered as “next-in-line” priorities as soon as the public finances allow. These include:
· Introducing capital allowances for infrastructure investment. This would cover the 28% of private sector infrastructure investments not eligible for tax relief under the current regime. This would apply to future spending to avoid deadweight cost and ensure only new infrastructure is incentivised. This would cost an average of £200 million per year if assets are depreciated over 25 years (4% rate), or an average of £130 million per year if over 40 years (2.5% rate).
· Improving access to finance for small and medium-sized enterprises (SMEs), with a mid-cap bond market as part of the Chancellor’s credit-easing plans, to try to increase the flow of credit to medium-sized businesses
· Enhancing the climate for investment in research & development (R&D), by extending the R&D tax credit to all non-profitable companies, and allowing them to factor the credit into R&D investment independent of their position in the business life cycle. This would cost around £200 million a year. Widening the definition of the scheme to include design would promote innovation and cost around £40 million a year.
In addition to its representations to the Chancellor, the CBI has submitted proposals to the Government’s growth review. Along with measures to unlock private sector investment in UK infrastructure, its submission focuses on:
· Education and skills — ensuring all young people leave education equipped to develop their full potential, requiring all schools to offer triple science GCSE, more effective co-ordination of business involvement in schools, help for SMEs to offer work experience, support for business relevant skills in higher education, ending age-dependent funding for apprenticeships and supporting further involvement by SMEs.
· Logistics — helping a vital component of our economy, and an important growth sector with a current annual turnover of £86bn, maximising use of existing infrastructure with longer and higher vehicles and more night-time operations, encouraging local authorities to consider logistics as part of major planning consents, and helping the sector to develop new technologies and processes.
· Rural economy — raising the productivity of the rural economy, which had an output of £145bn in 2007, to approach or match that achieved in an urban setting, recognising and supporting agricultural innovation, boosting internet roll-out to rural areas, abolishing the Agricultural Wages Board and the Agricultural Minimum Wage.

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