The Chancellor’s dependency on the private sector to deliver growth is a “risky” strategy, economic forecasters have said.
Businesses will have to step up their investment and export plans in order to meet George Osborne’s fiscal goals, as a squeeze on welfare leads to dampening of consumer spending, the EY ITEM Club said.
Earlier this month, Chancellor George Osborne announced plans to make large companies pay towards apprenticeship training, an investment allowance fixed at £200,000 and a new minimum living wage of £7.20 per hour for those aged 25 or over from April 2016.
While EY ITEM Club predicted business investment will accelerate to 7.4 per cent in 2016, from 5.1 per cent this year, it said this and any export growth is “unlikely to go far enough” to stop growth slowing.
It forecast GDP growth to reach 2.7 per cent in 2015, before slowing to 2.4 per cent in 2016 and 2017.
Peter Spencer, chief economic adviser, said: “The Chancellor has thrown down the gauntlet to businesses in a risky strategy that will require them to rise to the challenge and respond positively to his Budget announcements.
“Companies will have to invest in plant and skills to boost productivity and allow them to pay higher wages. However, we expect this strategy to be only partially successful.”
Mark Gregory, chief economist at EY, said businesses must increase spending and borrowing levels. He said: “As labour is becoming more expensive, following the Chancellor’s announcement for the introduction of a living wage, investment levels should increase.”
Businesses could look to technology to reduce labour costs, he added.
Following Bank of England governor Mark Carney’s suggestion that an interest rate rise decision could be made at the turn of the year, EY ITEM Club predicted rock-bottom rates until autumn 2016.