By GRAHAM FROST 29/11/2011
Today Chancellor George Osborne announced his review of the state of government finances and, given the constraints of austerity measures, the somewhat limited outlook for growth. It was only last March that he launched over 100 initiatives for growth alongside the budget.
A lot of progress has been made on small business initiatives, largely incentives and the cutting of red tape. Some schemes, like carbon capture, failed to get off the ground, whilst others, like the business growth fund, have hardly made any headway at all.
No recession forecast
The Office for Budget Responsibility has, as expected, revised down its outlook for growth, to 0.9% for this year, 0.7% next year and 2.1%in 2013. Consequently, plans to eliminate the budget deficit by the end of this parliament will not be met and the government will have to borrow £112 billion more than anticipated over the next four years. However, a recession is not forecast and the ratio of debt to GDP will peak at 78% in2014/5, thus saving us from the bond vigilantes currently attacking Italy.
Boosting lending
The Chancellor announced a bank guarantee scheme, capped at £40 billion, allowing small and medium sized businesses to borrow at lower rates. Banks are obliged to pass on lower interest rates to small firms. So, instead of withdrawing support for banks, the government is prolonging it due to the unexpected turmoil emanating from Europe, our largest trading partner.
Other measures to boost growth include a £1billion fund to help job creation by small business. In a boost to house builders, Osborne has agreed to underwrite the mortgages of 100,000 first time buyers. At the same time, he scores some political points by increasing tax levies on banks in order to maintain his levy of £2.5 billion p.a. from them.
Infrastructure spending
The other big deal is a £20 billion plan to get private investors, like pension schemes to invest in infrastructure schemes guaranteeing a real return. That seems likely to be attractive and should put people to work as well as providing much needed facilities for improving long term productivity.
Best of a bad hand
Our view is that the Chancellor has made the best of a bad hand but the impact on overall activity is likely to be limited and not a game changer for markets. He’s making use of the perceived ‘safe haven’ status and low interest rates of UK government debt. That may not last if he is seen to be going soft on fiscal discipline. More important for market confidence to be regained remains a solution to the European sovereign debt and banking crisis.