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Fiscal time bomb will damage British businesses warns ICAEW

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The ICAEW has warned of a looming “fiscal time bomb” for British businesses and urged the government to do more to boost workplace skills and exports.

The accountancy body said that the “fiscal time bomb” comprising the increase in the living wage, the apprenticeship levy and insurance premium tax hikes would impact on businesses. And, it added, once interest rates start to rise the economy could lose momentum from domestic spending.

“Given that the chancellor reduced the pace of fiscal austerity at the Summer Budget, if growth slows beyond 2016, we could have a fiscal deficit after the next general election,” it said.

Its warning came as it upgraded its economic forecast for 2015 from 2.3 per cent to 2.6 per cent, helped by a post-election bounce in business confidence and household spending, which was supported by rising earnings growth and low inflation.

The ICAEW said it expected the UK to remain one of the fastest-growing developed economies this year and next and upped its business investment forecast for 2015 to 7.4 per cent from four per cent previously. This it said was due to a fall in spare capacity encouraging businesses to invest while interest rates remain low.

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It revised its 2015 unemployment rate forecast to 5.4 per cent from 5.1 per cent as it said businesses appeared to be making better use of its existing workforce with part-time work declining.

This though, had contributed to an increase in productivity, which is now forecast to rise by 1.2 per cent in 2015 and 1.3 per cent in 2016 compared with just 0.7 per cent growth in 2014.

“When you take a look at the economic problems in China, and the slowdown in the eurozone, you could easily think that things are quite rosy in the UK. Economic growth is up, tax receipts are rising, and the election result has fostered a confident atmosphere that is causing businesses in many sectors to look to increase capital spending over the next year,” said Michael Izza, ICAEW chief executive.

“But while growth of 2.6 per cent is good, we’re not exactly booming, and there’s certainly plenty of areas of the economy that are holding us back. We could do so much better, especially when it comes to exporting, and upskilling our workforce.

“In addition, the government seems to constantly stall on long-term investment decisions, which is constraining our hopes of a long term recovery. The fiscal time bomb and a future interest rate rise will damage businesses and consumers. This will potentially lead to lower tax receipts and if that happens the chancellor simply won’t meet his deficit reduction target. It will become a three-parliament problem.”

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