Where Next for the British Economy?

There may be some bumps in the road to economic recovery ahead as has been indicated by the disappointing growth in services showing a slowdown during May in both new business and employment. Analysts had expected a strong reading following the abysmal indicators published for April on the back of the volcanic ash cloud. The Times referred to HSBC economist Stuart Green who said that this data “suggested that the UK recovery will continue to tread a largely uninspiring path”.

Equally disappointing were the sales and profit figures for consumer services over the three months from March to May published by the CBI: Leisure and personal care as well as hotels, bar and restaurants recorded not only markedly lower sales but also drops in profitability and optimism. These latest numbers cast serious doubts over whether the private sector will be able to compensate for the public sector spending cuts. This morning, the Office for Budget Responsibility (OBR) has downgraded the growth forecast for the British economy to 2.6% from Alistair Darling’s more optimistic 3.25% announced in March.

The latest IMD World Competitiveness Yearbook should make uncomfortable reading for British businesses: Of the 58 economies ranked along 300 criteria, the United Kingdom ranks 22 (down one place from last year) with a score of 76.808 as opposed to the 100 points for the leader Singapore. There are undoubtedly a few lessons to be learnt from the IMD classification: The leading countries not only benefit from strong demand in Asia, but also stand out, according to the IMD, by their low levels of debt and deficits.

For the first time, the IMD has also presented a ‘debt stress test’, measuring when the nations’ debt levels will revert to a ‘bearable’ level of 60% of their respective GDP. On the back of the global economic crisis the deficits of the major industrial nations have been soaring, and, as far as the G20 countries are concerned, the IMD expects the average debt to rise from 76% of GDP in 2007 to 106% in 2010. Therefore, although the recession is behind us, its consequences will likely be felt for some considerable time to come. The UK economy, according to the Swiss researchers, is not expected to reach the 60% debt threshold until 2028.

The Prime Minister has set the tone for the budget cuts to come in his speech earlier this week. My personal suspicion is that the well orchestrated and highly publicised announcements over the past few weeks are setting the stage for potentially worse than expected cuts when the Chancellor announces his budget on 22 June: Rumours of a VAT increase to 20% (or potentially higher?) are rife, as are indications of a cut in free school dinners for the poorest and an increase in tuition fees and Capital Gains Tax. There can be no doubt, higher taxation – and in particular an increase in VAT – will inevitably lead to fall in consumer spending, as recently suggested by Stephen Robertson, the Director General of the British Retail Consortium, in an interview with the BBC. As far as the impact of a potential VAT increase on Charities is concerned, please see my blog posted in February.

Up to 725,000 public service jobs could be lost over the next four years and spending cuts could push unemployment to nearly 3 million by the end of 2012, the Chartered Institute of Personnel and Development’s chief economic advisor, Dr. John Philpott, stated a few days ago. Similarly, in a letter to Chancellor George Osborne, the CBI’s deputy director John Cridland agreed that a radical re-engineering of public services was necessary if tax rises were to be avoided, stating that ‘only an effective cost reduction strategy can safeguard future growth’.

This last point surely should apply to all of the economy, and Expense Reduction Analysts’ experts are ideally placed to ensure your organisation achieves best value for its money, not only today but every day.