Why Plan B may yet be needed
WE’RE just days into the New Year and, after months of grim anticipat i on, t he UK’s massive f i s cal c o n s o l i d a t i o n programme has begun in earnest.
It will probably be well into 2011 before it becomes clearer just what the ConservativeLiberal Democrat Coalition Government’s package of tax hikes and spending cuts will mean for the economy north of the Border.
What is without doubt is that, after months of debate over the impact and warnings about the speed and depth of the cuts and about the Coalition’s hike in value-added tax, the machine has now been set in motion.
On January 4 the VAT rate was hiked from 17.5% to 20% – a move aimed at raising £13.5bn per annum by 2014/15.
This £13.5bn-a-year which the Treasury hopes will flow into its coffers will be coming out of the pockets of consumers in Scotland and elsewhere in the UK. It is way too early to gauge the precise effect but we underestimate the impact of this move, which is equivalent to roughly three pence on to the basic rate of income tax at current estimates, at our peril.
And 2011 will almost certainly be the year that the swingeing public sector spending cuts really begin to bite.
It may be that the big moves in Scotland do not start emerging until after the Holyrood election i n May. However, what has been made plain is that hundreds of thousands of public sector jobs will go in coming years throughout the UK.
The debate continues to rage over whether this will cause further job losses in the private sector or whether firms will ride to the rescue and recruit those laid off by the state. It is, unfortunately, still easier at this point in time to imagine the first scenario than the second.
It was therefore heartening to hear rumours recently that an economic “Plan B” was being drawn up by civil servants, in case the recovery cannot withstand the huge fiscal tightening which will be implemented as the Coalition aims for £113bn per annum of public spending cuts and tax hikes by 2014/15.
This chatter appeared to indicate an awareness that the fiscal plan (which is aimed at cutting national debt but may not achieve this if it snuffs out recovery) may have to be changed around as its effects become clearer.
The Government at Westminster appeared at pains when this talk surfaced in December to deny any need for a Plan B. However, it will hopefully keep a very close eye on the unemployment numbers as it implements its fiscal programme and adapt it as appropriate, in the same way as a business would alter its plans with changing circumstances.
The fact that unemployment did not rise nearly as far as had been feared during the recent recession was a crucial factor in the economy being able to haul itself back to growth.
Events in the labour market as the fiscal consolidation unfolds are likely to be critical to the outlook for the economy north of the Border and in the UK as a whole.
And people must not make the mistake of comparing this economic recovery with that of the early 1990s. After all, we are emerging from a recession caused by a financial crisis and the signs remain that the UKbanking sector is still unwilling or unable to lend normally. Finance is vital to firms eyeing new markets or product launches, considering recruitment, or planning investment for growth, and there remains far too much anecdotal evidence that such funding is still not freely available
Meanwhile, many firms dependent on the public sector for work will be keeping an anxious eye on developments. Some of the business lobbying groups may have under-estimated the impact of the public sector spending cuts on their own members.
However, at least there have been signs of strength in the economy with the manufacturing sector appearing to be doing well. Within this, Scottish Engineering has reported that its members have been performing strongly. Manufactured exports will be crucial to Scotland’s future, as will inward investment.
And many Scottish firms are battlehardened after the deep recession. This should stand them in good stead as they face the next huge challenge for the economy – fiscal tightening.
Meanwhile, we will all have to keep our fingers crossed that the Scottish and wider UK economy can end this year with recovery intact.
It is still too early to ascertain the effect of the ConservativeLiberal Coalition Government’s package of tax hikes and cuts