The Treasury and FSB tussle over economy

The Treasury and the Federation of Small Businesses (FSB) in the U.K. are at odds over which is the best way to approach the current economic situation.  Following its recent survey of confidence in various business sectors, FSB has urged that VAT rates should be cut for the construction and tourism industries, to promote the growth of small businesses and encourage spending in areas such as hotels, restaurants and catering.

According to the FSB survey, business owners have lost confidence since the first quarter of this year.

The biggest drop in this respect was in the motor vehicle industry, both sales and repair; from +20 in the first quarter of 2011 to -45 at the end of June.  Overall, the level of confidence has fallen in 13 of the 18 business sectors monitored, with the northeast regions of England showing the greatest drop.

The think tank Ernst & Young ITEM Club also reported it had changed its growth forecast downward, for this year and for 2012.  The Club’s chief economic adviser, Peter Spencer, told media reporters that the reduced forecast resulted mostly from the crunch on household spending.  He said prices are going up but wages are not, so there is less money available to create a demand for services.  He added that problems in the Eurozone, specifically Greece, could escalate to other countries including Ireland.

Chairman of FSB John Walker said that a reduction in VAT would help encourage small businesses to grow and hire new personnel, which would be a key factor in putting the economy back on track.  FSB maintains that earnings from that sector would offset the decrease in revenue from VAT, but the Treasury says such a move would not be feasible.  They say that FSB’s claim requires much careful thought, and so far there has been no indication that the government is re-thinking its strategy.