Economy under the microscope – small percentages matter

The devaluation of the pound against a basket of currencies was the immediate reaction as a result of the referendum. Given that a significant amount of personal and business expenditure involves the purchase of goods and services sourced abroad, a weaker pound has increased the price paid for such items. This is feeding through to a higher general level of price inflation within the economy (the measure used most frequently suggests prices are now rising by about 3% per year).

Inflation rate matters because it has a direct impact on consumer spending and given that consumer spending constitutes about two thirds of our Gross Domestic Product (GDP), anything that curtails spending will slow the rate at which the economy grows. Indeed if the inflation rate exceeds the rate of wage increases, which is currently the case, real incomes actually reduce. Economists are attributing the recent slowdown in the rate of UK growth to the increase in the inflation rate.

It is tempting to think that so long as the economy is growing, the actual rate of growth is not particularly important, however that would be a mistake. An economy is a delicate balance involving governments collecting money through taxation and spending that money on public services. If taxation, as a percentage of national income or GDP, becomes too high, tax receipts can actually decrease as those contributing most (individuals and companies) lose the incentive to increase their earnings or possibly leave altogether for another tax jurisdiction. The last recorded data showed UK tax receipts to be about 32.5% of our GDP and the scope to move much above this figure is limited by the potential disruption of the balance mentioned above. So if we accept that 32.5% is an optimum figure, the rate of GDP growth becomes critical in determining how much tax is actually raised.

On that assumption a quick and simplified analysis suggests that every 1% of economic growth adds over £6bn to tax receipts over a twelve month period. Therefore with public finances under real pressure, even small changes to our rate of growth are of enormous significance.

Andy Milsom, Head of Partner Training & Development at BNP Paribas Leasing Solutions

Andy is an experienced sales and finance professional with over 25 years’ experience in sales aid leasing. Andy is widely recognised as an expert in business finance and has in recent years focused his attention on developing partner sales teams develop an understanding of how businesses secure project financing. His training programme – Finance Unlocked – is a highly rated customisable course and is offered at no cost to partners.

If you’re interested in helping your sales team overcome finance-related hurdles during the selling cycle, please get in touch with Andy on 07966 114 243 or email here.