Remedy for economic ills

Mar 24 2009 by Sarah Green, The Journal

WHILE the principle of removing corporation tax for a year, as proposed by the North East Chamber of Commerce in The Journal yesterday, may initially seem a great idea for North East business, the reality is that in a region highly dependent on public sector spending, you cannot ask a cash-strapped Chancellor to spend without receipts.

That is particularly true as public finances have already taken a battering from a combination of the cost of rising unemployment and lower tax receipts during the recession.

With economic activity expected to contract by 3.3% and unemployment set to reach nearly three million this year, the outlook for the public finances is already alarming.

Against this backdrop, a further significant fiscal stimulus is unaffordable and would lead to businesses and households retrenching in fear of higher tax bills in the future.

Instead, the CBI is proposing a package of measures that will: underpin confidence; boost competitiveness, employment and investment; improve the skills base and bring public finances back on track, with minimum harm to the social and economic fabric of the UK. The package includes:

Reversing recent decisions that add to business costs and threaten jobs, including delaying the rise in employer National Insurance contributions due in 2011 and smoothing out volatility of impending rises in business rates.

Making better use of public spending by modernising public services to ensure they deliver quality and value for money.

Pushing ahead with building work in schools, hospitals, communications and transport to support construction jobs and position the UK for recovery.

Temporary measures to stimulate demand for low-carbon goods and boost consumers’ and firms’ spending, including a scrappage scheme for cars, vans and domestic appliances.

Fast-tracking support for jobless people through Jobcentre Plus and making the Train to Gain programme available to all employers.

Reducing the impact of the recession on the current generation of graduates and improving the UK’s skills base by introducing a temporary subsidy for master’s degree courses in science, technology, engineering and maths.

We need to see measures to instil confidence by supporting as many businesses through the recession and safeguarding as many jobs as possible.

That means not adding to the cost of employing people with business tax rises when companies are fighting for survival. In the face of sharply rising unemployment, investing in skills will help business stay competitive and ensure the UK is in pole position for the eventual upturn.

So, we need action to help firms retain and retrain staff, measures to support unemployed people and to improve our skills base.

With several years of belt-tightening ahead, we need to squeeze the value out of every penny of taxpayers’ money.

There is no room for further fiscal demand stimulus. If automatic stabilisers are taken into account, there is already very significant stimulus – more than 3% of GDP. More would risk undermining confidence of foreign investors in gilts and increasing fears of dramatic tax rises in years to come.

The Bank of England is providing monetary stimulus in quantitative easing and, on top of interest rate cuts, this is preferable to stimulate activity.

Sarah Green is regional director, CBI North East