AUSTERITY has been “overdone” and a more flexible approach to fiscal policy is now needed to boost UK productivity and put the economy on a more stable footing, a leading academic has warned.
Professor Ronald MacDonald, Adam Smith chair of political economy at the University of Glasgow, fears the recovery will not be sustainable without boosting the UK’s historically low productivity levels.
He expressed concern over the potential impact on public spending in Scotland in light of the Chancellor’s intention to find a further £30bn of cuts in the next two years.
And, while noting that the overall figures on growth and employment presented by the Chancellor were impressive, emphasised that “we have to remember where we came from these past few years”.
Speaking at a Budget Briefing hosted by The Herald, attended by more than 130 business professionals, Professor MacDonald said: “My concern about the economic growth is that is it based on a shoogly peg or not, because there is very little in the [Budget] document about productivity.
“It’s about 50 per cent below the long-term average. Most worryingly for me is that the OBR… are talking about productivity peaking quite soon, and then productivity growth going down.
“So how sustainable is the growth going to be? That’s my worry. I think we are going to be relying too much on international factors going forward if we can’t improve productivity.
“We see that the ECB [European Central Bank] is following a classic beggar thy neighbour devaluation policy, which isn’t really good news for us.”
Professor MacDonald was part of a six-strong panel of business experts who assessed the impact of the final Budget of this parliament at the 200 SVS building in Glasgow.
He declares that the “exclusive focus” placed on the deficit by the current government is “unhealthy”, adding:
“I personally wish going forward there had been much more flexibility, rather than this very strict and rules-based approach to austerity.
The broad consensus from experts on yesterday’s panel was that the Budget was political in nature with little in the way of big announcements.
Topics covered ranged from tax breaks for the oil and gas industry to changes to pensions and tax, as well as legislation to crack down on tax evasion.
On plans for a so-called Google tax, the diverted profits tax aimed at multinationals which divert profits offshore fears Fraser Campbell, partner at accountancy firm Campbell Dallas, said too many small Scottish firms are being unfairly caught by anti-avoidance measures.
He said: “What we tend to see in practice is the law of unintended consequences, where practices which maybe five or six years ago were seen as low risk, no tax avoidance, not anything other than making sure you have arranged your business affairs efficiently, are now coming under attack.
“The Revenue are not necessarily going against big multi-nationals – it’s the ordinary, run of the mill entrepreneurial businesses that employ the majority of people in the country.”
On taxation, Robert Burns, partner at law firm Burness Paull, highlighted the importance of entrepreneurs’ relief, which was preserved at the Budget. It limits capital gains tax to 10 per cent for those selling businesses, instead of the normal rate of 18 per cent or 28 per cent.
Mr Burns said: “The 10 per cent rate is really important, because if you discourage people from setting up businesses, you discourage people from keeping their business in Scotland, if the endgame is too high a tax rate when the company [is sold].”
Derek Hanlan, director of taxation of Craig Corporate, said he would like to have seen more certainty for business on annual investment allowances, which currently stands at £500,000 after being increased last year. It is due to fall back December 30, though George Osborne said a “reduction to £25,000 would not be remotely acceptable”.
Mr Hanlan said: “He [George Osborne] almost flagged up that he hasn’t made up his mind. That’s the sort of uncertainty that businesses don’t want. It’s due to revert back to £25,000, that’s a big, big difference. He suggested it will somewhere in between, well pick a number and go with it. Give businesses certainty.”
Turning to pensions Ken Welsh of VWM Wealth fears there is an “advice gap” in light of plans to allow the UK’s five million pension holders the right to cash in their annuity.
Mr Welsh said: “The plans give more flexibility to people coming to retirement, which is great, and the state rolling back its involvement, which is also great. But as Ed Milliband alluded to there is an advice gap. Pensioners will have the ability to take the money, but advice is thin on the ground.”
Graeme Downie of Orbit Communications said the Budget would neither lose or win votes for the Coalition parties. Referring to the tax breaks announced for North Sea oil operators, he said “fundamentally they probably had no choice, but electorally is not going to gain them anything. You are not going to find Aberdeenshire or the Aberdeen area suddenly becoming a Tory seat.”
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