UK Quarterly Outlook Economics – Budget – Wealth

1. UK Quarterly Outlook Economics – Budget – Wealth April 2014James Sproule, Chief Economist Institute of Directors James.sproule@iod.com@jamesrsproule

2. Macro Economics

3. UK economic forecasts remain too calm Economic forecasts have a strong tendency to underestimate volatility • Consensus estimate real trend rate of UK growth to be ~2.0% • Disaggregating consensus does not significantly raise forecast volatility Conclusions • Look to economists for a trend • Any trend forecast has to stack up with expected changes that can be observed (demographics etc.) UK GDP (HM Treasury consensus survey forecast) Forecast Source: HM Treasury

4. European economic forecasts have proved too optimistic Economic forecasts have a strong tendency to underestimate volatility • IMF expects economies in Europe and the US to recover slowly to trend rates of growth over the next two years • Looking to 2007 IMF forecasts, a slowdown was predicted, but nothing of the length or scale that subsequently developed • Quantitative easing programmes in US (significant), UK (very significant) and Euro zone (moderate), yet to provide solution to underlying financial problems • Forecasts specifically exclude a renewed euro zone crisis GDP (2007 & 2012 forecast) Forecast Source: IMF, IoD Policy Unit

5. Credit – still stalled • 1918 - 2008: US money supply grew at 6%, since then it has grown at 28% p.a. • US QE has involved wider range of instrument purchases than in UK and Japan, including Mortgage securities. • Banks have used easy money to rebuild balance sheets. US bank credit has grown by -0.4% p.a. since 2008 • From 2000-08 Euro zone M3 grew by 8.8% p.a., since 2008, growth has slowed to 2.7% p.a. • Disaggregated data shows that southern EU has seen substantial drop in bank credit. • Flow of savings to “safe” northern Euro-zone banks has been slowly reversing. • Overall Target 2 system remains in deficit • German deposits are down 23% • Spanish claims fell by 34%, French 42% & Italian 23% • UK Broad money has not grown since Jan 2010 • QE remains focused on Gilts, banks on meeting capital requirements • Bank of England has indicated that it is to ease focus on capital solvency ratios in order that banks can lend more US Bank Credit (1987=100) EU Bank Credit UK Money Supply UK Money Supply Source: Fed Reserve, ECB, BoE, IoD Policy Unit

6. UK CPI Source: ONS, IoD Policy Unit

7. Budget 2014

8. UK Taxation Tax Revenues as per cent of GDP • UK Tax total revenues as a per cent of GDP - constant over last decade (35% with a standard deviation of 0.7%). • Peak 36.3% in 2006, trough 34.3% 2003 • Highest OECD taxes globally are in Denmark (48.5%) and Sweden (47.4) • Lowest OECD taxes are in: Mexico (17.9%); Chile (20.5%), US (26.4%), lowest European is Switzerland (28.5%). UK Tax Revenues – source by tax • UK total General Government Outlays as a per cent of GDP has averaged 45% since 2001. • The difference is the deficit and the accumulated deficit (debt), the latter rising from X% in 2001 to y% in 2012 Source: OECD

9. Key Tax Policy Questions – An Overview & Summary of IoD proposals We consider that the four overarching concepts which ought to drive fiscal policy to be fairness, incentives, simplicity and sustainability. Fairness Our proposals highlight areas where the tax burden could become or has already become unfair:- • Reversal of significant erosion of basic rate tax band • Aligning tax thresholds to create a more transparent personal taxation system • Elimination of economically and fiscally undesirable addition rate of income tax • Legislating to cap direct taxation so that individuals will always retain the greater part of their income and capital Business Incentives Our proposals recognise the need to provide broad based incentives across the business spectrum by:- • Further business rates reliefs • An option for all entrepreneurial businesses to opt to become tax transparent • Removing tax distortions impacting business (or personal) decisions Tax Simplification It is important to enhance the stated intention to simplify taxation for both businesses and individuals by:- • Removing complex requirement for entrepreneurial businesses to estimate taxable profits • Alternative to the complex, unpopular and expensive saving for pensions Focus on Sustainability & Fiscal Receipts It is essential that the capacity for taxation in the economy is continually re-assessed and challenged by:- • Government capital receipts need to be matched by debt reduction, not spending increases • Taxes raising less than £5 billion ought to be challenged for fundamental reform if they create economic distortions or are expensive to collect

10. Wealth

11. Global Gini co-efficients • Gini coefficients are measures of a Lorenz curve: 1=all wealth is concentrated in a single person, 0=all wealth is equally distributed regardless of merit. • Gini above ~0.5 clearly leaves a populace disenfranchised, does a Gini below ~0.25 simply fund a bureaucratic state and hence hinder growth? • UK Gini hit an all time low of 24 in 1978, and has now risen in 2012 to 4, the global average Source: UN University, IoD Policy Unit

12. UK Income Dispersion • UK has moved large manufacturing and Trades Union domination to smaller company services economy • Elimination of punitive high tax rates now make aspiration realistic option • Limited movement since 2009 indicates a new equilibrium has been reached Source: ONS, IoD Policy Unit