The government has been consistently saying that there is no Plan B but with the faltering economy is the chancellor really going to say nothing in the autumn statement next month? But then, is he really going to do a U-turn?
The government is worried about economic growth and it is clear why. GDP fell 0.5% in the weather affected final quarter of last year, rose 0.5% in the first quarter of the year and second quarter economic growth was only 0.1%. Effectively, the economy has been stagnant for nine months. Looking forward, the signs are ominous: manufacturing output has fallen for three months in a row; financial institutions are cash-rich, which we are obviously all very happy about, but they are unwilling to invest due to the uncertainty; unemployment rose to 2.57m in the last quarter, which is not going to do anything to help consumer confidence or spending.
So what can be done? The Bank of England reduced interest rates to 0.5% two and a half years ago. Reducing this further will make little difference. The Bank of England injected another £75bn of quantitative easing, which makes more money available to financial institutions for lending. However, for this to make a difference, they need to be more willing to lend.
The government’s autumn statement on 29 November will be an interesting insight into whether government is serious about jump-starting the economy. Ideally, if you want to make the best of this then you would put it into areas that give the most, and quickest, benefit for economic activity. This is basically repair and maintenance. It is quick to get off the ground, with framework contracts already there anyway, and it is labour intensive so gets people working.
Also, the government could do more to bring in private investment as, according to Plan A (not that there is a Plan B), government spending on construction is set to fall 20% in four years. The Nine Elms development in London is using private finance, as is Crossrail, and with government underwriting risk on projects private finance could be made more use of.
So, back to the questions, is the chancellor going to say nothing and let the economy slide or do a U-turn?
Well, it is most likely is that he will bring forward spending from three or four years down the road and argue that it will be funded by efficiency savings and the like, so it doesn’t affect the deficit reduction plan, so there will be some more spending in the next 18-24 months. However, it won’t be on repair and maintenance. The government likes shiny new high profile projects so expect a few housing, transport and energy infrastructure top of the agenda. Just don’t expect it to jump start construction, or the economy, any time soon…