Shadow North East MPC Meeting November 2024 - Decision Cut by 1/4 Percentage Point
By Donna James, Research Director at Populus Select
After a transformative budget which seeks to reverse decades of underinvestment, where without change investment in our country was falling further, and where our productivity and investment gap with our neighbors continued to widen I choose to be positive about this fundamental shift in approach to a Keynesian tax and spend to attempt to turn around the huge supertanker that is our low skills, low productivity, low growth economy despite the many vibrant private sector organisations out there doing amazing things.
There are, without doubt, short-term and very real headwinds for SMEs. The question is whether the budget will crowd out or crowd in private investment. Recent years of austerity and low investment have shown that without government investment in the country’s wider infrastructure, private investment does not flourish and grow. In this country our private and public investment and risk-taking have been chronically low compared to competitors. Furthermore, our private sector boasts only a small proportion of companies with high productivity followed by a huge and long tail of companies with very low rates of productivity.
Our economy driven by what should be a vibrant private sector is held back by labour shortages, poor mental and physical health of our labour force which has shrunk, lack of good transport, and the vicissitudes of reliance on imported energy. Skills supply is problematic, and our provincial cities lag disproportionately behind London in terms of output. So, starting to fix the fundamentals by investment in skills, health, and bringing people back into work (particularly the pathways to work trials now being funded), in energy, and through an industrial strategy and the national wealth fund will be, in the medium term, a boost to the economy and good for the private sector.
If labour is going to be more expensive, this might be an imperative for organisations to invest in capital rather than labour.
In this budget, there have been severe blows to SMEs mostly through the rise in National Insurance contributions for employers. The Chancellor stated that organisations are more able to flex and show resilience than households, however, time will tell whether this additional burden will depress investment. Given the requirement for SMEs to increase productivity and investment to push this growth agenda, this is where the Chancellor ruling out other tax increases boxed herself into a very nasty corner.
Where I felt the Chancellor missed opportunities were in:
1. Standing up to the motor lobby and raising fuel duty to at least bring some coherence to green policy and to nudge change;
2. Raising inheritance tax – this to me is a golden opportunity to both drive forward more equity in our society and to raise more funds, an unpopular view, but fundamentally better than NI increases on businesses.
Inflation is around the target more or less, and a reduction in the BoE base rate would give a much-needed leg up to companies to get on the investment train.