As he gazes across the Commons to a new shadow cabinet, George Osborne will doubtless be prouder than ever of the long-term economic plan that helped his party stampede to victory in May.
For a chancellor who never tires of saying that his stewardship of the UK economy has made it among the best performing of the developed world, now more than ever he will want to paint himself as a safe pair of hands. But Osborne can’t expect an easy ride: he has a bumper in-tray and economic threats from home and abroad. Here are his six big challenges:
Osborne will face growing criticism as he seeks to impose yet more austerity. He has been collecting ideas from government departments about how they might slash up to 40% more from their budgets by 2019-20, and will reveal where the axe will fall in his spending review on 25 November. His call for the state to “deliver more with less” and save an additional £20bn in public spending comes on top of measures in July’s budget for £12bn of savings from welfare and £5bn from tax changes.
It is not just civil servants who are feeling hard done by. Osborne is on a collision course with the retail sector thanks to his plans to hike business rates and increase the minimum wage. The chancellor used his summer budget to unveil a “national living wage” – a 50p increase in the statutory minimum pay rate for over-25s from April, to £7.20 an hour, followed by a series of stepped increases expected to take the rate above £9 an hour by 2020. But businesses are already warning they might have to cut jobs and raise prices as a result. Retailer Next and Whitbread, owner of Costa Coffee and Premier Inn, have been among those complaining of their higher labour costs. High street stores and supermarkets are also anxious about business rates rising over coming years. The rates are hated by many small high street businesses, and Osborne is under pressure to shake up the system. A review is due before next year’s budget.
The coming months may well challenge Osborne’s claim that his plan is working. Latest indicators suggest 2015 could be a year of two halves: momentum has been seeping out of the economy since July. Sharp falls in exports and manufacturing output last week offered the first evidence that the global slowdown may be taking its toll – bad news for a chancellor who espoused a “march of the makers” to rebalance the economy away from its over-reliance on consumer spending. Martin Beck of Oxford Economics commented: “With growth in the third quarter likely to be wholly reliant on services, the goal of a better-balanced economy looks an ever-more-distant prospect.”
Among other domestic challenges, Osborne must prove that his Northern Powerhouse plan is more than just a catchy name, and that he is serious about the UK’s woeful productivity. And with crude prices tumbling, Osborne may be called on to find more ways to help North Sea oil producers.
One area beyond Osborne’s control but bound to ruffle business and household feathers alike is interest rates. After more than six years of borrowing costs at a record low, the Bank of England is telling borrowers to prepare for a hike.
The Bank of England highlighted the “global headwinds” facing the UK as it unveiled its decision to keep interest rates on hold last week. China’s downturn has sent shockwaves through global markets and been felt in the real economy too thanks to waning demand for all manner of goods and services and big swings in commodity prices.
Closer to home, the Greek problem has not gone away. It remains to be seen whether, after elections next week, a new government will push through the reforms international creditors have demanded. That leaves lingering fears over the prospects for exports to our key trading partner, the eurozone.
The planned referendum on whether the UK should stay in the EU is another potential flashpoint between the Conservative government and business. Big employer associations such as the CBI have repeatedly called for the UK to remain in a “reformed EU”. Osborne will want to convince them his government is getting the changes they want in Brussels in return for the hit to confidence they say they will suffer as a result of the referendum.
Osborne’s plan for an eight-percentage-point corporation tax surcharge from next year is infuriating “challenger banks” such as Metro and Secure Trust, which are trying to break the stranglehold of the big four on the high street. The surcharge is being introduced just as the bank levy – based on a bank’s balance sheet rather than its profits – is being watered down, in a move that helps large banks such as HSBC and Standard Chartered.
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