Autumn statement 2011: nef's response

The Government has recognised the need for public spending and infrastructure investment but the scale and direction of the Chancellor’s plan falls hopelessly short of what we urgently need. nef reaction:

• Continued austerity will not deliver secure sustainable jobs
• Financial services remain criminally under-taxed
• More action urgently needed on lending
• Money misdirected at unsustainable infrastructure instead of a Green New Deal
• No plan to rebalance the economy for a sustainable stable future.

Summary response:

We welcome the Government’s recognition that it is on the wrong track, but if you’re going to do a U-turn, you should do it properly.

Serious public investment is now urgently needed to create sustainable, secure employment. Instead we have a National Infrastructure plan which will not come close to replacing the £44bn of lost private sector spending or stem rising unemployment.

Rather than investing in green infrastructure and jobs the Chancellor has targeted unsustainable energy intensive industries. And instead of a Financial Transaction Tax we have a banking levy with no teeth that will be offset by corporate tax cuts.

- Dr Tim Jenkins, Director, Great Transition

Detailed Policy views

1. Economic and Fiscal outlook: Partial U-turn

James Meadway, Senior Economist at nef -

George Osborne had the opportunity in today’s Autumn Statement to admit his scorched Earth economic policy was failing. Hammering public spending in a weakened economy has led to a collapse in real activity, with unemployment rising and borrowing £112bn more than forecast.

Instead the Chancellor has offered us the unholy combination of slavish devotion to austerity, now extended beyond the current Parliament, and a National Infrastructure Plan that looks like a cobbled-together compendium of every scheme the Treasury had on stocks.

£5bn extra in public infrastructure spending does not come close to replacing the £44bn of private sector spending lost since the recession began. And at least 20 per cent of it is to go on high-carbon road improvement projects, not targeted measures to improve public transport.

“The details are not yet clear on how private pension funds will be persuaded to invest additional sums in UK infrastructure. There’s every chance that this will cost more than through simple government borrowing. The last thing we need is a PFI mark two.

Squeezing public sector wages to pay for infrastructure projects is robbing Peter to pay Paul. Private sector employment creation has been so weak in regions outside of London that they depend on public sector employment and spending. The 710,000 public sector job losses now forecast by the Office for Budget Responsibility, nearly double its previous estimate, are catastrophe in waiting. Factor in the threats to employment protections Osborne has made, and it is clear living standards and working conditions will continue to worsen for most.

2. National Infrastructure Plan: Climate leaders to Climate laggards

Dr Victoria Johnson, Head of Climate Change & Energy at nef -

Despite the OBR’s implicit warning that our addiction to fossil fuels has stymied growth; the Chancellor seems intent on holding maintaining our carbon addiction with a mish-mash of infrastructure plans that mostly undermine the UK’s climate change commitments.

Earlier this month the International Energy Agency stressed the need to stop building high carbon infrastructure to avoid “locking in” to dangerous climate change. The Chancellor has ignored both this and the UK’s own carbon budgets favouring high carbon infrastructure such as roads over sustainable low carbon infrastructure.

While we welcome investment into public transport infrastructure, wind energy and smart meters, the big money goes to roads and airports that move the economy in the wrong direction. Spending £1 billion on roads to reduce congestion is both a missed opportunity and based on a flawed assumption – that increased road capacity will reduce congestion. Counter intuitively, increases in highway capacity attract new traffic through a process of ‘induced demand’. This is an empirically robust feedback. So not only will congestion be unaffected, emissions from road transport will likely rise.

An investment to increase onshore wind’s contribution to the electricity supply from its current 1.9 per cent to 10 per cent would create over 36,000 jobs in installation and direct and indirect manufacturing alone.

Osborne’s announcements will inevitably knock the UK from climate leader to climate laggard.

3. Bank levy: Financial Services remain criminally under-taxed

Lydia Prieg, Finance and Business Researcher at nef -

The funds raised from British banks via the bank levy are likely to be entirely cancelled out by the government’s corporation tax cuts. It is also worth remembering that the financial services industry is exempt from VAT, which has introduced significant distortions into the UK economy, and has very likely inflated banks’ profits.

The taxpayer is nowhere near recouping the cost of the extraordinary support extended to the banking industry throughout the crisis (for example, the billions forfeited to recapitalize Lloyds and RBS), and this ignores the substantial on-going cost of financing these initiatives (which the NAO estimate to be approximately £5bn per year). The revenue raised from the bank levy (£2.5bn) will be a drop in the ocean compared to these costs, particularly given the cuts in corporation tax”

Furthermore, despite the output that the UK lost as a result of the banking crisis, the financial services industry will still be able to offset losses incurred during the crisis against their future tax liabilities, and so reduce their future tax bills!”

The financial services industry remains undertaxed in comparison to other sectors of the economy.

4. Credit Easing & National Loan Guarantee Scheme: Triumph of hope over experience

Tony Greenham, Head of Finance and Business at nef -

The government has still failed to grasp that when it comes to SME’s our banking industry is no longer fit for purpose. We are handing more subsidies to banks with no guarantee that the benefit will flow through to the high street.

Even to suggest a form of debt securitisation for small businesses after the sub-prime mortgage bubble is a triumph of hope over experience. When lenders can play pass the parcel, the quality of lending decisions suffers and the risk of mis-selling increases.

What we need are local banks that focus only on the real economy – the needs of individuals and SME’s – and have no interest in financing Chinese dams and Canadian tar sands, or speculating in financial markets or commercial property. Our competitor economies such as Germany and the USA have such banks, why don’t we?