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CBI Recommends UK Fiscal 'Plan A Plus'

by Robert Lee,, London

14 November 2011

The UK government needs to consider enhancing current deficit reduction plans, the Confederation of British Industry (CBI) has said, stressing the need for reform of the country's tax credit regime.

Unveiling its latest economic forecast, the CBI warned that continued uncertainty in the eurozone, with the resulting weaker prospects for exports and investment, has led to a marked drop in business and consumer confidence. Consequently the business group now expects GDP growth to be 0.9% in 2011 and 1.2% in 2012, down from previous estimates of 1.3% and 2.2% respectively. Total business investment is expected to grow by just 0.6% in 2011, down from 3.7% in the previous forecast, and 6.9% in 2012, down from 9.3%.

Reacting to its figures, the CBI has urged the Chancellor to stick to current deficit reduction plans in his autumn statement and consider specific measures to kick-start growth by unlocking private sector investment and removing "road blocks". A package of initiatives suggested by the CBI includes a range of measures it believes will help kick-start growth, at little extra cost to the Exchequer.

The CBI's priorities focus heavily on the improvement of infrastructure, where the CBI projects an additional GBP200bn (USD319bn) in investment will be required over the next five years, including a series of tax-related measures which should be rolled out as soon as the public finances allow. They are as follows:

  • Enhancing the climate for investment in research & development (R&D), by extending the R&D tax credit to all non-profitable companies, and allowing them to factor the credit into R&D investment independent of their position in the business life cycle. This would cost around GBP200m a year. Widening the definition of the scheme to include design would promote innovation and cost around GBP40m a year.
  • Introducing capital allowances for infrastructure investment. This would cover the 28% of private sector infrastructure investments not eligible for tax relief under the current regime. This would apply to future spending to avoid deadweight cost and ensure only new infrastructure is incentivised. This would cost an average of GBP200m per year if assets are depreciated over 25 years (4% rate), or an average of GBP130m per year if over 40 years (2.5% rate).
  • Targeting measures on tackling youth unemployment, including a Young Britain Credit worth GBP1,500 for firms taking on an unemployed person aged 16-24, which would cover the first year's National Insurance for employers. This would cost GBP150m a year, which the CBI says is affordable within the context of the government's deficit reduction plans. Freezing youth rates of the National Minimum Wage would also prevent the young and inexperienced from being priced out of the labour market.

John Cridland, CBI Director-General, said: "The government must stick to its plans to bring down the deficit to maintain confidence in the UK's public finances and keep the cost of borrowing down, but now is the time to revitalize its growth strategy and create a 'Plan A plus'. In uncertain economic times, confidence falters, investment grinds to a halt and job opportunities fade. This package of measures taken together could make a real difference to the economy, creating jobs and boosting growth in the years ahead."

Ian McCafferty, CBI Chief Economic Adviser, added: "The recent turbulence in the eurozone has seriously dented business confidence, which has led to a reappraisal of investment and export prospects. Survey evidence points to economic growth having stalled in coming months, resulting in a significantly weaker outlook for the year ahead. We expect UK GDP growth to be flat in the fourth quarter and rise only very slightly in the first quarter of 2012. We still think we can avoid a double dip, but the risks have increased."

Chancellor George Osborne is due to release his autumn statement on the state of the UK economy on November 29. He will issue it alongside the Office of Budget Responsibility's publication of its economic and fiscal outlook.

TAGS: individuals | tax | economics | business | tax incentives | fiscal policy | energy | entrepreneurs | United Kingdom | tax credits | small and medium-sized enterprises (SME) | unemployment | tax breaks | tax reform

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