Institute of Directors warns business is ‘battening down hatches’, while big drop in manufacturing output adds to gloom
The Institute of Directors is to put further pressure on George Osborne by urging him to take urgent steps to promote investment, as it says business is “battening down the hatches” for the rest of the year.
The IoD said most firms had delayed investment decisions and employing new staff after taking the view that growth this year would be worse than last year.
“Business is battening down the hatches in the expectation that the recession will continue for the rest of the year. That is bad news for the economy at large, because decisions to invest money or take on more staff are being postponed until things look up,” Graham Leach, chief economist at the IoD, said. “Low confidence leads to delayed decisions, and delayed decisions further undermine economic confidence – it’s a vicious cycle.”
Leach said the government’s agenda was “pointing in broadly the right direction, but the overwhelming opinion of our members is that they are doing too little, too slowly”. He called for cuts to red tape and simplification of employment law to “make a real difference to the cost and complexity of doing business in the UK”.
The sharp fall in manufacturing output revealed on Tuesday added to the gloom following a survey by the CBI that revealed expectations for growth during the autumn have evaporated.
The figures are a blow to the chancellor, who has seen his forecasts for deficit reduction and growth skid wildly off track. Analysts said that by next April Osborne could overshoot his spending target by up to £40bn if growth continues to flatline and government spending outstrips tax receipts, forcing him to accept higher debt levels or consider further austerity measures.
The Institute of Directors said a poll of its members revealed a lack of confidence in the government’s growth forecasts. It said most firms had delayed investment decisions and employing new staff after taking the view that growth this year would be worse than last year.
The IoD joined a wide range of business lobby groups and opposition parties to call on Osborne to promote investment and growth to prevent the recession dragging into the second half of the year.Labour’s shadow chief secretary to the Treasury, Rachel Reeves, said the chancellor’s promise to secure the recovery and get the deficit down was in tatters. “His failed plan has delivered the exact opposite – a double dip recession which is leading to soaring borrowing. What more evidence does the government need that their plan has failed and they need to change course?”
Shadow business secretary Chuka Ummuna tweeted: “Yet more evidence of the Government’s economic incompetence but will Cameron, Clegg, Cable and co change course?”
The Office for National Statistics said public sector net borrowing, excluding bank bailouts, showed a deficit of £557m, compared with a £2.8bn surplus in the same month last year. Analysts had been expecting a surplus of £2.5bn. The data heightens concerns that the government will miss its deficit reduction target.
The ONS said the total deficit since April had reached £47.2bn – up £11.6bn on 2011 – excluding financial interventions and a one-off boost after assets from the Royal Mail’s pension fund were transferred to the Treasury. Vicky Redwood, UK economist at Capital Economics, said the figures “continue the deterioration seen over the past few months. At this rate, borrowing for 2012/13 overall will massively overshoot the Office for Budget Responsibility’s forecast of £120bn, excluding Royal Mail effects, by over £35bn.
“And with the recovery falling well short of the OBR’s expectations, we think that the government will struggle to cut borrowing at all next year.”
July is usually a buoyant month for tax receipts, but this year the corporate sector has been hit hard by the downturn. ONS figures showed North Sea oil and gas output has been unusually low, leading to lower profits and a cut in tax payments.
The impact of a near 20% drop in corporation tax receipts was to push government receipts down 0.8% in July on the same period last year.
Government spending, meanwhile, grew 5.1% on the previous year, mostly on welfare payments. Lower revenues from oil and gas companies accounted for about £1bn of a £1.7bn shortfall in corporation tax compared with last year.
The government had planned to eliminate the structural budget deficit by 2015 with a tough programme of spending cuts and tax rises.
It has eliminated a quarter of the deficit so far, though this figure is in line with Labour’s pre-election target and not the more aggressive plans outlined by George Osborne in the summer of 2010.
Osborne has failed to meet his own targets and his tougher austerity programme and the weak economy have forced him to extend the planned fiscal consolidation by another two years. David Cameron has warned austerity could last until 2020.
A Treasury spokesman blamed a cut in North Sea oil production for the bulk of the fall in corporation tax receipts. He said it was expected that government spending would increase in response to the “weakening global economy” and higher welfare spending, but it was still too early in the financial year to draw firm conclusions about the year as a whole.
“The government remains committed to the credible plan we have set out to deal with Britain’s debts, and today’s numbers emphasise how risky it would be to deliberately increase borrowing,” he said.
Manufacturers responding to the CBI’s monthly industrial trends survey pointed to prolonged weakness in the economy. A balance of -21% of firms saying orders are falling compared with those saying orders are up represents the lowest return since the end of last year.
The CBI said: “Similarly, export orders have weakened with manufacturers reporting a balance of -17%. While still above the long-run average of -21%, this is the lowest figure reported since January 2012, when it reached -26%.”Anna Leach of the CBI said: “The economic environment for UK manufacturers remains challenging, with domestic demand relatively muted and the ongoing eurozone crisis now seeming to drag on broader global economic momentum.”