July 20, 2015    3 minute read

UK Economy Targets Long Term Surplus

   July 20, 2015    3 minute read

UK Economy Targets Long Term Surplus

The Conservative manifesto at the 2015 polls outlined balancing the books as a strong priority, and the Chancellor’s Summer Budget, announced on the 8th July, demonstrated how this could be accomplished by 2019.

The onus has essentially now been passed onto businesses, with a major overhaul of tax credits, and companies paying a national living wage dominating the headlines. The Chancellor’s principle works on a simple basis; cutting back spending on public services, and relying more on increased private sector investment, potentially leading to a fiscal surplus. But the question remains: is this really achievable?

The Ernst & Young Item Club suggest it is; predicting through their model’s that by 2019 net government borrowing could be -0.4%, resulting in the Treasury effectively making a profit. EY’s recently released analysis, suggests this could be driven by a sizeable change in the way GDP growth is driven, citing a major increase in export gains for firms, and a drop in consumer spending growth.

The figures suggest that this year alone, exports will be up 5.1%, and the 2018/19 figure may stand at a further increase of 4.2%. Factors largely driving this are a predicted strengthening of the Euro as the European recovering looks well established, despite some major distraction from a poor Greek position.

On the other hand, slower growth in consumer spending could be caused by a rise in the Bank of England’s base rate, which EY predict will first take place in 2016, increasing by a small increment to 0.6%, then again in 2017, increasing more substantially to 1.4%. The UK is also currently enjoying low inflation at just 0.1%, but EY predict a rise over coming years, hitting the 2% target by 2018, and remaining there until at least 2020. But this is a reflection of how strong the UK economy is becoming, confident in the fact aggregate demand will hold; prices rising again defy any odds of another recession.

It’s hoped that increased benefits to UK firms via increased export activity, could help drive private sector investment, especially in the service sector, where the UK largely holds an absolute advantage over other, mainland European countries. When the government cuts the welfare bill, the free market will be left to look after low income workers. Increased investment will be required; however this is where the risk of the Chancellor’s plans comes in.

When wages rise quickly, and, productivity and profit for firms doesn’t keep up, real wage unemployment may be of concern. If the National Living Wage is set to reach over £9 by 2020, as predicted in the Summer Budget, some firms may have to cut the wage bill, by laying-off workers, or not hiring additional staff, as the cost of labour capital rises. In such circumstances, consumer spending growth could drop further than predicted, which in turn could see economic growth decrease. Aggregate demand, could in the long term be more volatile than expected, potentially putting the breaks on surplus target plans.

Whether or not this prediction materialises, depends heavily on whether business’s can lead the recovery over the medium and long term, and whether that results in a budget surplus of the future. Strong economic predictors do suggest however, that budget surplus plans are achievable.

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