Attacking the recession

The UK recession deepened more than expected in the first three months of this year, but this should prove to be the worst of the quarterly falls in GDP and the recession is expected to moderate in the second half of 2009, the CBI has said.

Nevertheless, the recovery will be slow and fragile, according to the CBI, with GDP growth resuming only in the spring of 2010.

As a result of the state of the economy, several groups are now urging the government to take immediate action in the forthcoming Budget.

Researchers at the National Endowment for Science, Technology and the Arts (NESTA) believe that the government should use the Budget as an opportunity to reshape the economy by investing in three key growth sectors: healthcare, green technology and digital media.

Jonathan Kestenbaum, NESTA's chief executive officer, said: 'Previous industrial interventions in the 1960s and 1970s ignored demand and focused on unsuccessful attempts to pick winning firms rather than new growth areas. The government must invest in areas where future demand will drive next-generation technologies.'

To that end, NESTA is calling for a £1bn high-technology start-up fund focused at the sectors. The fund would be jointly financed by the government and private investors. The idea is reportedly being considered by the government in the run-up to the Budget.

Jon Moulton, founder of venture capital fund Alchemy and an angel investor, said: 'One only need look at the stimulus package announced by President [Barack] Obama to see how far ahead the US is planning in areas such as renewable energy. We have to do the same and extend it to biotechnology and digital media.'

Representatives of the motor industry have also called for government support, urging the chancellor to seize the opportunity to send strong ‘buy-now’ signals to kick-start demand in the new-vehicle market by introducing a UK scrappage incentive scheme.

The Society of Motor Manufacturers and Traders (SMMT) is also calling for wider tax reviews aimed at increasing sales across the car and commercial-vehicle markets.

It is asking the government to remove or delay the planned 2010-11 introduction of a first-year rate of tax on new cars.

In addition, it would like to see an increase in the Annual Investment Allowance for businesses to £500,000 to boost spending on vans, trucks, construction equipment, buses and coaches.

It has other ideas too, one of which is to enhance the Reduced Pollution Certificate discount for trucks, buses and coaches to create an incentive for people to purchase Euro 5 vehicles through reduced vehicle excise duty (VED) rates and deferring the new CO₂-based business car capital allowance regime to 2010-11 to avoid tightening the squeeze on cash flow for business car users.

It also believes that delaying the introduction of the Benefit-In-Kind (BIK) tax regime for the use of demonstrator and stock-in-trade cars would ease the unplanned cost adjustment burdens facing many employers and employees.

For their part, representatives of the Society of British Aerospace Companies (SBAC) are troubled by the cutbacks in the research and technology budget of the Ministry of Defence and believe that more - not less - investment is needed.

According to SBAC, the budget has gone down by seven per cent this year. It stood at £540m in 2007-08 and £502m in 2008-09.

SBAC believes that the decline will harm both the armed forces' ability to carry out their roles in the future and will be a signal to the industry of the government's declining commitment to maintaining high-skilled research.

As a result, it is calling on the government and industry to invest heavily in research and technology to ensure that the armed forces have the right equipment for the future.

Whatever measures are taken by the government to boost the economy, the CBI predicts that it will have shrunk by a total of 5.1 per cent by the end of this recession, which is not as severe as the cumulative 5.9 per cent seen in the early 1980s recession.

The recession is expected to last until the end of 2009, marking six consecutive quarterly falls in GDP. Sluggish growth will resume in the second quarter of 2010, picking up slowly over the course of the year, giving an annual average for 2010 as a whole of GDP growth of 0.1 per cent.

Unemployment is expected to continue to worsen over the next 12 months, breaking the 10 per cent barrier in 2010.