26 November 2015 | By Rain Newton-Smith Insight

Balancing the books on the back of business

Insight: Rain Newton-Smith, director of economics, CBI

By prioritising housebuilding and infrastructure and protecting the science budget, the chancellor made some good choices in his spending review. But the government needs to be wary that their strategy of shifting more and more responsibility for it onto business is pushing some firms to tipping point.

Before the chancellor stepped up to the dispatch box to deliver the comprehensive spending review and the latest autumn statement, we knew there were going to have to be some tough choices. Business will be happy to see George Osborne stick to balancing the books over the course of the parliament, particularly as there were some positive steps to encourage longer-term investment in the economy. But the cumulative burden of the living wage, apprenticeship levy and business rates risks hurting business competitiveness.

Many firms will be disappointed that they have been kept hanging on for a much-needed review of business rates until next year’s budget, but the real sting in the tail of this statement was the size and scope of the apprenticeship levy.

Setting the levy at 0.5 per cent of payroll for firms where this is over £3m is essentially an extra payroll tax – similar in effect to a rise in National Insurance. It will also hit more companies than originally thought.

The creation of a levy board should now give business a voice on how the money is spent, to ensure the focus is on quality of the apprenticeships it delivers.  

The long-term picture

But businesses will be pleased to hear the chancellor reaffirm his commitment to an industrial strategy – and his emphasis on nurturing a vibrant business community.

The government needed to prioritise spending on areas that promote long-term growth and investment, and he delivered in the form of announcements on housebuilding, maintaining roads and rail and protecting the science budget. 

Solving the housing crisis is critical to firms being able to recruit and retain talented employees across the country. This, along with the focus on infrastructure, will also provide a shot in the arm to the construction sector.

But it will now be important to see the promised projects – from the £13bn promised to transport in the north to a better solution for Kent in the event of Operation Stack – breaking ground as early as possible to maintain momentum.

We'll also need to see more of the detail on the shift from grants to loans for Innovate UK to make sure it doesn't dampened bold and game changing innovation, particularly among smaller businesses.

But business wanted to see a credible fiscal plan, and by prioritising these areas the chancellor made some good choices. So overall this was a good spending review for longer-term investment in the economy.

And firms will want to build on this and play their part in improving prosperity in the UK. The call now is for the government needs to be wary that their strategy of shifting more and more responsibility for it onto business is pushing some firms to tipping point.