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Ian Brinkley
Economic Advisor
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Ian Brinkley

Building a resilient economy

Authors: Ian Brinkley Ian Brinkley

19 March 2014

The Chancellor started promisingly  by declaring that he was going to back ‘makers, doers and savers’ and focus on support for industry, investors and exporters in order to create amore resilient economy. It was also a fiscally balanced budget, which must be right given that the OBR expects growth this year of 2.7 per cent and the Bank of England is even more optimistic with a forecast growth rate of between 3 and 4 per cent.

The most welcome announcement of all was the one that got the least attention in the budget speech – the extension of the Apprenticeship Grant for Employers programme and the expansion of degree level and masters level apprenticeships. A recent assessment by the Institute for Employment Studies (IES) found that the scheme had been effective with benefits to both individuals and society highly positive compared with the cost. The increased funding for higher level apprenticeship will also help increase apprenticeship quality and credibility as a good alternative to more academic qualifications. Both measures will cost £110 million in both 2014-2015 and £2015-2016. With over 900,000 young people still unemployed, and 30 per cent of all 18 to 24 year olds out of work for more than 12 months, action is clearly needed.

Also welcome was the announcement of extra funding for a new research centre - the Alan Turing Centre - and additional funding for centres for doctoral training and “catapult” centres for cell therapy and graphene. These are all key areas which potentially offer big opportunities for the UK economy and where we have expertise. Support for R&D is always welcome, but the  increase in the R&D tax credit for loss-making SMEs  may not be the best way to support it as the evidence that the credits encourage additional R&D investment is ambiguous. The costs of all these measures will £50 million in 2014-2015 and £120 million in 2015-2016. In addition, the Chancellor announced increases in the generosity of support for exporters, which is also welcome.

The Chancellor was right to focus on the need to increase investment, a long-standing weakness of the British economy. The increased in the Annual Investment Allowance (AIA) will cost over £2 billion between now and the end of 2015. Subsidising the cost to more energy intensive industry of the Carbon Price Floor will cost another £1.8 billion between 2016-2017 and 2018-2019. However, the weakness of such measures is that they tend to have high deadweight costs, so the additional boost from such measures may be smaller than anticipated.

The Chancellor was also right to see the low saving as a key long term weakness in the UK economy. He introduced more generous tax-breaks intended to encourage saving that will cost over £2.6 billion between now and 2018-19. However, successive governments have been trying to increase the savings rate since the early 1990s with various financial incentives and none of them have had any success. What seems to happen is either that savers take the gains or move their savings around to the most tax efficient arrangement. So the impact of these measures on the savings rate may also be more limited than the Chancellor hopes.

The increase in personal allowances will help the low paid, and that is also a welcome objective. However, as  the Budget statement makes clear there will also be equal absolute gains for higher rate tax payers. As others have pointed out, a cut in national insurance contributions for the lowest paid would have been more effective. For those on low wages the main direct tax is national insurance, not income tax. The otherwise commendable desire to reduce the tax burden on the low paid might have been even better served by increasing thresholds or reducing employee national insurance contributions rather than increasing income tax thresholds. The only virtue of the absurd marriage tax allowance is that it will “only” waste £130 million between now and 2018-19.

Our preference would have been to see rather less spent on these sorts of investment allowances and savings incentives, and more cash devoted to supporting some of the other Budget measures and other priorities which we think might offer better returns. For example, we would have liked to see more funding for high quality apprenticeships together with a reformed Work Programme delivering high quality support and skills development for the long term unemployed and other disadvantaged groups in the labour market. In addition, we would have liked to have seen more support in areas such as funding for the Technology Strategy Board and the “catapult” technology transfer centres and a more generous longer term settlement for research and innovation in science, engineering, and design. These are areas that can contribute significantly towards the Chancellor’s vision of a resilient economy.