Economy woes: Shoppers walk past stores on Carnaby Street in central London. Unemployment in the country is expected to rise by around 500,000 from 3.6% to 5% next year. — AFP
LONDON: The British economy faces a decade of lost growth unless the government takes action on investment tax reliefs, the Northern Ireland protocol and the shrinking workforce, the Confederation of British Industry (CBI) is warning.
In its latest forecast, the CBI said the United Kingdom has already fallen into a “short and shallow” recession that will leave business investment 9% below 2019 levels and productivity 2% below its pre-pandemic trend at the end of 2024.
CBI director general Tony Danker said Britain seems to be retreating from priorities raised by Prime Minister Rishi Sunak at his Mais Lecture in February when he was chancellor and is now removing incentives to invest and innovate, and abandoning any agenda for growth.
“Britain is in stagflation – with rocketing inflation, negative growth, falling productivity and business investment,” Danker said.
“Firms see potential growth opportunities but a lack of ‘reasons to believe’ are causing them to pause investing in 2023. Government can change this. We will see a lost decade of growth if action isn’t taken.”
The bleak outlook accompanied its forecast for the economy to shrink 0.4% next year as the cost of living crisis hammers household spending and interest rates rise to 4%. Gross domestic product (GDP) recovers in 2024 with growth of 1.6%.
Unemployment in the CBI’s outlook rises by around 500,000 from 3.6% to 5% next year, while inflation, currently at 11.1%, squeezes household incomes throughout 2023 and remains above target at 2.6% at the end of 2024.
“Britain fails to invest as much as it should compared to our G-7 competitors in capital, people, and ideas, and it was (Sunak’s) view that government needed to play a role in changing that,” Danker said. “But the truth is, we still have no plan.”
The CBI’s bleak projections follow forecasts for an even deeper recession outlined by the Bank of England, the Office for Budget Responsibility and the Organisation for Economic Cooperation and Development.
The CBI expects the United Kingdom to suffer the second worst recession of major economies after Germany. Persistent weak productivity and business investment “doesn’t bode well for the country’s potential to grow,” it said.
Danker said the government can take action to restore confidence among businesses and boost growth, chiefly through a massive tax break on investment.
In April, the corporation tax super-deduction expires and the tax rate rises six percentage points to 25%.
The CBI has called the super-deduction to be replaced with full-expensing, under which every penny invested in plant and machinery can be deducted from taxable profits.
Rain Newton-Smith, the CBI chief economist, said it would cost £10bil (US$12.28bil or RM53.8bil) in the first year but have no fiscal cost in the longer term.
The tax break would unlock an extra £50bil (RM270bil) in capital investment a year by the end of the decade and add a quarter of a percentage point to the sustainable UK growth rate, the CBI said.
Business investment is already well below major economic rivals in Europe and the United States.
With out the tax break, it will lag even further behind.
Danker said time was running out.
He acknowledged that last month’s fiscal statement, at which the chancellor announced £55bil (RM296bil) of savings to repair the public finances, was necessary to ensure economic stability but he warned “the country does not have a plan for growth.”
A plan needs to be built around boosting productivity and increasing labour supply, he said.
The United Kingdom is the only major advanced economy with fewer people in work than before the pandemic.
“We have higher levels of long term sick than other countries and our healthcare system is obviously under strain,” Danker said.
“That’s a particular British circumstance that needs a particularly British response.
“We’ve talked to government about providing incentives for occupational health, private or otherwise, to get workers back into work.
“At the moment, the government is relying on the National Health Service (NHS). I don’t think that’s credible, given the state of the NHS,” he said.
Fixing the Northern Ireland Protocol, the controversial post-Brexit arrangement governing trade at the border between Northern Ireland and the Republic of Ireland that remains the main source of tension with the European Union (EU), would boost growth by bringing the United Kingdom closer to the EU.
“Once we resolve the protocol, then you start to open up all the other opportunities areas,” Danker said.
Danker added that there was a vacuum developing in government for impetus on green development, which has taken a backward step since Boris Johnson’s premiership.
“The big policy lever that’s missing is around green growth,” he said.
“There is a genuine and widespread concern that this government is going backwards on green growth.
“It is by far and away the largest economic growth prize for Britain competitively in the rest of the world.” — Bloomberg
