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The Guardian - UK
The Guardian - UK
Business
Richard Partington Economics correspondent

CBI warns Rishi Sunak against ‘doom loop’ of public spending cuts

Rishi Sunak, pictured on 24 October, has been cautiously welcomed by company bosses.
Rishi Sunak, pictured on 24 October, has been cautiously welcomed by company bosses. Photograph: Alberto Pezzali/AP

The head of the Confederation of British Industry has warned Rishi Sunak against pursuing an austerity “doom loop” of cuts to public spending and tax rises amid fears over a mixed outlook for the economy.

Tony Danker, the director general of the CBI, said it was vital for the new UK prime minister not to repeat the mistakes made by David Cameron’s Conservative-Liberal Democrat coalition when billions of pounds were slashed from public spending.

“Let’s remember, the 2010s began with some austerity and were then ensued with very low growth, zero productivity and low investment, right? It wasn’t a successful strategy for growth,” he told BBC Radio 4’s Today programme.

UK government borrowing costs fell back on Tuesday to levels last seen before Liz Truss’s disastrous mini-budget a month ago, while the pound rose sharply against the dollar to trade close to $1.15 – a level last seen in mid-September – as global investors welcomed Sunak’s elevation to prime minister.

The yield, or interest rate, on 30-year gilts fell by about 0.1 percentage points to stand at 3.7%, on a day of tumbling borrowing costs for governments across Europe amid a sharp drop in global gas prices.

European natural gas prices have fallen below €100 (£87) per megawatt hour for the first time since Russia cut supplies earlier this summer, helped by milder weather and efforts to boost storage ahead of winter. Analysts said the development could reduce inflationary pressures and lower the cost of government interventions in the energy market across the continent.

Company bosses have handed Sunak a cautious welcome after weeks of political turmoil under Truss led to a collapse in business confidence and many firms putting their investment decisions on hold. The chancellor, Jeremy Hunt, is pushing ahead with plans to announce tax and spending measures on Monday to help cut the government’s budget deficit – the shortfall between revenue and spending – in an effort to placate jittery financial markets.

Danker, who represents more than 190,000 companies as the leader of Britain’s largest business lobby group, said he recognised the need for Sunak to “stabilise” the public finances after the turmoil in financial markets caused by Truss’s mini-budget.

However, he suggested swingeing cuts to public spending could undermine the government’s ambition to grow the economy.

“If all there is is tax rises and spending cuts, and there is nothing in there about growth, the country could end up in a similar doom loop where all you have to do is keep coming back every year to find more tax rises and more spending cuts because you’ve got no growth.”

Jürgen Maier, the former chief executive of Siemens UK who is vice-chair of the Northern Powerhouse Partnership, said years of “lies, policy blunders and incompetence” had severely damaged the UK’s reputation on the world stage, exemplified by Brexit.

Writing in the Guardian, he called on Sunak to pivot to rejoining the EU single market as a powerful tool to rebuild business confidence.

“It was the biggest lie of them all: that we could replace the economic upside of being part of the most advanced free-trade zone in the world. No independent trade deal can replace its economic upside. It is time to face up to this as a country,” he said.

It comes as concerns mount over the strength of the British economy as businesses and households struggle with the highest inflation rate since 1982. According to the latest monthly industrial trends snapshot from the CBI, factory output fell in the three months to October as business confidence collapsed at the fastest rate since the early days of the Covid pandemic.

The survey of 279 manufacturing firms, which is closely watched by the Bank of England and the Treasury for early warning signs from the economy, showed that industrial companies’ concerns over access to skilled labour had hit the highest level since 1973.

Alpesh Paleja, the lead economist at the CBI, said: “It’s a tough time for manufacturers. Price pressures remain acute, availability of materials is still a big issue – and it is 49 years since manufacturing firms were this worried about being able to find workers with the skills they need. It’s really no surprise that sentiment has deteriorated further.”

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