Inflation hits 6 year high, spelling trouble for the High Street
Can the newly published Industrial Strategy White Paper save the day?
On the 22nd of November, Philip Hammond MP delivered his first November Budget, moved from its usual month, March, to allow preparation of big announcements prior to the next financial year. The verdict? It was pretty sensible from someone known to favour incremental change rather than rocking the boat.
One of the biggest political issues across the UK for a number of years for ATCM has been how business rates has become corrosive to good urban regeneration and local economies as the digital economy has proved disruptive to the tax system. The Chancellor has adopted an approach that we have championed for a number of years, short-term measures to ease the pressure on businesses while exploring some of the more fundamental changes needed to drag our tax system into 21st Century.
There are two key measures the Chancellor is keen to push forward. Firstly, there is the transition from the Retail Price Index (RPI) to the Consumer Price Index (CPI) in England as a measure of inflation for rates. Business rate bills increase every year to take account of inflation. The Treasury has stubbornly stuck to using RPI as this measure even though CPI consistently comes in lower, and CPI is used as the main measure of inflation for nearly everything else.
It was former Chancellor, George Osborne, who first announced that the Treasury would move away from the use of RPI. Philip Hammond has taken the step of confirming when this will take place, the start of the next financial year, April 2018.
Secondly, the next business rate revaluation (expected in 2022) will be the last one using a five-year term. From then on, Philip Hammond has committed to bringing the revaluations down to every three years.
The impact of this is expected to be revenue neutral, however the benefit comes from less turbulence for businesses when the revaluations do happen. The more time that lapses between each revaluations means the greater disparity there is between the rates bills being paid by businesses and the real value of the property they occupy. More frequent revaluations should result in a fairer system.
While the two short-term measures are welcomed they do not deal with structural problems that exist within the business rates system, and they were both measures already announced by Hammond’s predecessor, George Osborne. One of the more interesting announcements was the imminent publication of a paper exploring the need for tax reform in response to the emergence of the digital economy.
This could lead to a considerable and much needed change in direction for the Treasury that ATCM could fully support. The digital economy has completely transformed our reliance on commercial property. The business rates system fails to take this relationship into account.
ATCM welcomes the course set by the Chancellor. They appear sensible. Through our chairs in the devolved nations, we are keen to make the case for similar action where required, not least Scotland where the Barclay Review has already made similar recommendations.
The Looming Shadow of Uncertainty
Despite some sensible recommendations by the Chancellor, there was no masking the turbulence ahead for the UK economy. Whatever positive spin he put on the Budget at the dispatch, the Office of Budget Responsibility (OBR) who have been tasked with crunching the numbers and providing a neutral assessment of the UK economy, were much more gloomy. It’s not looking good.
The vote to leave the EU has led to a fall in the value of the pound. Initially, our town centres had reaped the benefit of this through increased tourism from price conscious foreign visitors keeping growth buoyant. ATCM had understood that a fluctuating currency will be a double-edged sword also carrying negative aspects which the OBR has stated are starting to materialise. Consumer price inflation has increased as it becomes more expensive to import. It has been revealed that inflation has now hit a 6 year high, outstripping wage growth during the all important Christmas period. This has led to squeezed household incomes meaning a downward pressure on spending. The result is that a UK economy, too reliant on consumer spending for its growth, is now starting to slow.
Consumer spending is not the only problem. In response the previous Budget statements, ATCM has become increasingly concerned that about a factor that influences economic growth that we have historically struggled with – productivity. This is determined by how effective the UK workforce is and may be influence by things like the quality and suitability of employment workspace, digital connectivity, transport infrastructure and innovation across the public and private sectors. Well managed town centres contribute to better productivity.
Yet again, our productivity growth is weak. We have missed OBR forecasts for growth and so they have taken the decision to make a downward revision for future forecasts. The compound effect of lower consumer spending and productivity growth has led the OBR to lower real GDP forecasts in every year, down to 1.4% over the next 5 years. This is in contrast to other major economies that are enjoying stronger growth including the euro area, US, Canada and Japan who all outperformed the UK so for this year.
Another note of concern are future participation rates in the economy. There has been a downward revision of population growth forecasts with inward net migration expected to be 165,000 a year by 2023, down from 185,000 by 2021. While this may slightly ease the pressure in terms of land use pressures and capacity issues, it may have the opposite impact on issues like the funding of public services. This decline is expected to have a disproportionate impact on working age adults, bringing down labour market participation rates, meaning less people contributing to the public purse while still a need to fund investment in housing, infrastructure and public services.
The picture is gloomy, for business investment, for public services, for the UK economy in general. However, its not all bad news. The OBR notes that employment has again, defied expectations, increasing by 230,000 over the past three quarters, more than twice as fast as expected. Furthermore, the Treasury is able to breathe a sigh of relief with long overdue deficit reduction anticipated to finally become a reality with the OBR able to revise down borrowing by £8.4 billion to £49.9 billion for 2017/18. To be adding nearly £50 billion a year to the UK’s debt mountain over decade following the financial crisis is a concern, especially with the huge reductions in public spending we have already seen, but there will be some optimisation that the growth in our debt in slowing.
The Implications for Town and City Management: Why we Need to Target the Industrial Strategy
Whether its investment in local authorities, house building, tourism or day-to-day consumer spending, much of the assessment outlined above is relevant to our members across the UK. What we need to be clear about is what our role is in influencing the economy.
While there is little we can do to influence some of these issues, delivering better productivity is perfectly suited to town and city management and has been identified by the Government as a priority. The Industrial Strategy White Paper is out and ATCM is gearing up to working with Ministers and backbench MPs to ensure they understand the role our industry can play in boosting productivity in urban centres.
We are recommending that place, and place based strategies are at the heart of the Industrial Strategy.
We are recommending the creation of an Urban Productivity Programme to support town and city management schemes across the public, private and voluntary sectors in understanding how they can contribute to increasing productivity locally.
We are developing further recommendations for six key issues which we think are key to supporting the Post-Brexit urban economy:
Finally, we are putting together a feasibility study for our investment in policy support across the UK and Ireland that will allow us to take forward this ambitious policy agenda under a new business plan for ATCM.
Watch this space!