THE UK could fall into recession after Brexit if negotiators do not effectively agree on industry trade deals with EU partners, according to a leading academic.
Speaking at The Herald Budget Briefing, where panellists questioned the Chancellor’s decision to directly tax consumption at a time when economic growth is below forecasts, Professor Ronald MacDonald said the population still “underestimate how severe Brexit is actually going to be”.
The Briefing saw more than 130 people hear a panel of industry experts, led by The Herald political commentator, Iain Macwhirter, dissect the content of the Budget.
Mr Macwhirter noted that if Mr Hammond was “trying to deliver a boring and uncontroversial, ‘don’t mention the Brexit’ budget, he failed”.
Peter Smyth, head of public affairs at Indigo, argued that the Chancellor’s hands were tied regarding his policy choices as the Conservatives wanted to see a safe Budget that talked up the economy.
“A significant proportion of his party members genuinely ideological assume everything will be alright after Brexit and it will be good for the UK and that is the line the Chancellor has to pursue at the moment,” said Mr Smyth.
The uncertainty brought about by the Brexit vote was one of the key focuses of the briefing.
Graham Murray, partner at Wright Johnston Mackenzie said there was concern that politicians would spend the next two years negotiating our exit rather than on growing the economy, which in turn could be a drag on the economy in the short-term.
Noting that negotiations would be “extraordinarily complicated”, Mr Macdonald, research professor of macroeconomics and international finance (economics) at the University of Glasgow’s Adam Smith Business School, highlighted that 70 per cent of all trade in the EU is intra-industry, including the likes of the car industry, electronics and light manufacturing.
“The Brexiters are implicitly assuming that everything we trade is the final trade, but the supply chain is crucial to the UK’s industries. That is a big stumbling block. If we have to leave the single market and [the Government] cannot sign particular bilateral agreements for these particular industries then I think the kind of recession scenario that economists were predicting in their models [before the EU referendum], we will see that dramatic scenario happening.”
Mr Smyth called it a “safe, wait and see” Budget, noting that the Chancellor has another run in November.
“It was pulling out an open for business sign, but whether businesses are convinced, we will see,” he said. “Of the pressures facing Philip Hammond, that is the main one: his party wanted a safe budget that talked up the economy.”
Mr Macdonald, said the changes to national insurance contributions (NICs) and the reduction in the tax-free dividend allowance, may close loopholes, but asked: “why do this at a time where you may affect economic growth moving into a very uncertain period?”
Fraser Campbell, partner at Campbell Dallas, said the change in dividend allowance was of the same theme as the NIC changes. “Both are a direct tax on consumption. This affects people’s take home earnings. Consumption is driving the engine of the economy right now and yet he’s hitting it where it hurts most directly,” he said.
While consumer spending has helped reduce the deficit, Mr Macdonald said that consumers have realised the devaluation of sterling will lead to increased inflation and so they are spending while they can, effectively – which was not sustainable.
“I don’t see that growth being sustained as we’re now seeing the downturn in consumer spending,” he said. “Investment spending is not buoyant, so where will demand come from for sustained growth?
This rate of inflation, and the constraints it will put on growth, was one elephant in the Chancellor’s Budget room, he said; the other centred on productivity, which Mr Hammond noted “remains stubbornly low” – and the lack of infrastructure investment.
“There was very little in the way of how they are going to address the UK’s very low productivity and poor underlying growth trends,” said Mr Macdonald, who added that in spite having close to zero interest rates the Government still cannot encourage investment in revitalising the UK’s capital stock.
Mr Macdonald added: “Wages have been sticky and there has been creeping inflation and we have [therefore] seen real reductions in wages, so there has been no incentive for businesses to upgrade their capital stock.”
Mr Campbell, said “there was very little to encourage sustained investment”, which he said was disappointing ahead of the unchartered waters of Brexit.
Mr Murray said there “was largely the short-term boost but not a great amount of flexibility in there for increased spending”.
He added: “Given all uncertainty the Chancellor was keeping his powder dry. There are some technical factors in the short term that have painted a rosy picture but whether that can be sustained remains to be seen.”
Looking at the how Scotland’s economy can improve, the consensus was that infrastructure investment can drive the economy, and the country had to focus on what it does best to catch up with the growth in the rest of the UK. This includes life sciences, technology, food and drink.
“The focus is always business needs to spend more, it needs to be more practical. It’s about doing more with less,” said Mr Campbell.
The view from sponsors, after the event
Graham Murray, Partner said “The Herald’s Budget breakfast event is a valuable opportunity to hear first-hand what the key implications of the Budget are and what this means for Scottish businesses. As an independent Scottish law firm with an in-house wealth management team, we at WJM need to be aware from many different perspectives what the budget means for our clients. We were delighted to be asked to partner with The Herald in supporting the wider Scottish business community.”
Professor Ronald MacDonald, Research Professor of Macroeconomics and International Finance (Economics), University of Glasgow – Adam Smith Business School said “The event provided a useful interaction, on budgetary and fiscal matters, amongst a range of people with diverse backgrounds. The diversity of backgrounds gave added insight to the UK’s and Scotland’s fiscal position than could be achieved by taking a unitary approach. The event also provided a useful opportunity for people with an interest in fiscal matters to network.”
Peter Smyth, Head of Public Affairs, Indigo said “With this budget timed for delivery on the very cusp of a series of momentous developments – from Article 50 negotiations to a possible call for a new independence referendum – it’s vital that businesses understand the political and economic landscape that the chancellor’s new measures will help to define.
“Indigo has been delighted to partner with the Herald to help businesses begin to put everything into context, so that they can meet the opportunities and challenges that undoubtedly lie ahead with greater confidence.”
Fraser Campbell, Partner, Campbell Dallas said, “Once again the level of debate and discussion with local businesses and advisers made for lively discussion on the day as the audience and panellists debated the likely impact of the Chancellor’s latest budget in Scotland, the UK and the wider world stage.”
Kim Wilson, Managing Director, 200 SVS said “It was great to see so many of the business community coming together at 200 SVS, the perfect venue to discuss the Budget with such a dynamic panel of speakers.”