Predictions – Economy
The upcoming Spring Budget holds significant sway as businesses and policymakers anticipate its announcements.
Renewed confidence resulting from improved economic performance and certainty
Lately, businesses have seen a notable resurgence in confidence, reflected in the latest Business Outlook Tracker results:
- Optimism about revenue is the highest reported in the survey since August 2023
- 79% express confidence in their funding position, a substantial increase from just over 50% two months ago
- 69% expect an increase in profits
- 75% are confident about the economy
The increase in business optimism likely stems from improved economic performance and increased confidence that this performance will continue.
So – as falling inflation results in less steep input cost rises and optimism that the economy will start to grow lead to expectations around aggregate demand (AD) and sales, there will be an assumption that interest rates will begin to fall, which decreases the cost of funding.
Businesses not only seek improved economic performance but also crave certainty in economic conditions. Uncertainty introduces costs and challenges in planning and decision-making.
So, uncertainty can lead to difficulty in formulating a business plan, uncertainty around the return on investment, uncertainty to lenders, and pushing up lending costs. All of these can reduce the levels of investment that businesses make.
Despite a technical recession, the economy shows signs of resilience, with GDP expected to grow – and some sectors are being less hit by the cost of living crisis and falls in AD than others. Plus, inflation is continuing to fall – it was at 4% in January and should be back at the Bank of England’s target of 2% during spring. Interest rates have peaked and should fall during 2024.
Key economic indicators are following an upward trend, and the Bank of England seems to have been working in lockstep with the Government - taking it slowly and steadily, gradually reducing inflation without knocking us too far into recession.
This approach should continue, and it won’t be too long now before inflation is back at the 2% Bank of England target and interest rates fall to more normal levels - although it won’t be the near-zero rates that we became used to.
Fostering growth through policy
The burning question on everyone's mind is whether this renewed optimism is sustainable.
Our analysis shows that businesses think it is going to last. The Business Outlook Tracker showed increased investment across all areas monitored. The areas that are expected to have the biggest increases in investment are:
At least a third of businesses are proposing to invest more in each area – and 45% propose to invest more in skills development and 43% in technology. These are long-term investments that further demonstrate business confidence.
Against this backdrop of optimism, the Spring Budget offers a platform for transformative policy interventions. Businesses told us they're looking for the Government to focus on:
- Skills - greater access to/investment in skills and training
- Infrastructure – measures to improve transport, broadband, etc
- R&D – incentives for employers to invest in R&D
Specifically, in relation to tax policies, they would like to see tax incentives for employers to invest in skills, net zero-related tax incentives, and the simplification of the UK business tax system.
While the Government is constrained in what it can 'give away' – public finances are always tight during times of lower economic performance when tax revenues are lowest and need for public expenditure is greatest. Economic performance is better than predicted, and so the Government appears to have a little more to play with than maybe it expected.
November’s Autumn Statement already outlined definite changes coming this year: cuts to National Insurance, rises to the minimum and living wage, and a triple-lock boost to the state pension.
However, the areas that businesses have highlighted that they would like to see more Government support are also those areas that the Government may look to focus on because they align with Government priorities and previously announced policies.
Infrastructure
Spending on infrastructure aligns well with the levelling-up agenda, and the Government has already made announcements about scaling back HS2 and using some of that funding for regional transport schemes. There is also talk about the Government banning mid-contract price increases on broadband – which would please businesses as it increases their certainty.
Research and development (R&D)
R&D is always a Government favourite. The UK’s productivity has lagged behind many countries for some years and Government knows that any policies or tax incentives to increase R&D will likely translate into higher productivity and economic growth.
Skills
The Government has been focussing on skills, including policies to get the economically inactive back into employment. For example, the last Budget focussed on reforms to childcare and pensions and those sectors with skills or recruitment challenges, such as the care and hospitality sector. These targeted policies to increase the size and skills of the workforce are likely to come through in the Budget.
National insurance or income tax
A potential across-the-board reduction in National Insurance or income tax might also encourage people to re-enter the workforce or want to work more, which will also be a boost for companies in those sectors that have been struggling to attract talent. However, if tax thresholds remain frozen, then this might not have a massive impact.
Ongoing stability and resilience
Looking beyond the Budget's immediate impact, it's crucial to consider the importance of political stability and global resilience.
The upcoming election may introduce some uncertainty, but the alignment of political agendas towards fiscal prudence is a positive sign. Continuity and coherence in policymaking are indispensable for nurturing economic optimism.
The Spring Budget has the potential to be a transformative event that sets the UK on a path towards sustained growth and prosperity. It's, therefore, crucial that policymakers remain focused on delivering policies that foster growth and stability while also prioritising political stability and global resilience.
