Business will lead recovery, says Item Club

ECONOMISTS have forecasted a slow business-led recovery for the next few years as Britain grows financially again.

In its summer forecast published today, the Ernst and Young ITEM Club said that the chancellor’s plans to cut the public deficit, while keeping the pace of the economic recovery, would lead to more sustainable growth from 2013 because it will be led by business investment and export.

ITEM’s chief economic advisor Professor Peter Spencer said there was plenty of flexibility in the Government’s proposed public spending cut of £40bn.

“There’s tonnes of room for manoeuvre such as transfer payments which include welfare benefits,” he told TheBusinessDesk.com.

“While we think there will be much bigger savings than the Government has included in the £11bn in benefits.

“Interest rates are going to be a lot lower than everybody thinks and that in turn means the Government is going to save on debt interest.

“There’s also capital spending which they could have a look at. There’s a range of flexibility. There’s a difference between not achieving the £40bn and getting it in a different way.”

The report by ITEM, which stands for Independent Treasury Economic Model, says the exact breakdown of the spending cuts and savings will not be determined until the Comprehensive Spending Review in October.

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But Professor Spencer said he believed around £32bn of these cuts would come Government departments with a further £8bn in savings made from taxes, most obviously the rise in VAT from 17.5% to 20%.

“It’s much easier to hit the overall figure of £40bn than it is to specify numbers within it,” he added.

The report goes on to say that high energy prices and VAT rises will keep Consumer Price Index inflation above target over the next 18 months after which it will then move well below 2% as these effects wears off.

“It cannot be a consumer-led recovery – there won’t be enough money going into consumers’ pockets,” Professor Spencer said.

“The West Midlands is a major manufacturing area. It has suffered in the downturn but appears to be picking up the pieces.

“We have been talking about consumers having no money but while consumers are drawn into debt companies are swimming in cash and paying back the banks.

“It’s about time they used some of that money to invest and create jobs and replace spending and the jobs in the public sector which is being withdrawn.

“The Government deficit is around 11% of GDP whereas company surplus is around 8% of GDP. This applies primarily to manufacturing.”

•  The ITEM Club is a politically independent, non-governmental economic forecasting group  which uses HM Treasury’s model of the UK economy for its reports. Sponsorship from Ernst and Young is untied. The full economic forecast can be read at ey.com.