The economic backdrop to the forthcoming Budget is unprecedented. The Chamber network’s own Quarterly Economic Survey – the UK’s largest private-sector business survey, and a leading indicator for UK GDP growth – suggests that UK economic conditions remained exceptionally weak at the end of 2020 with all the key indicators in Q4 still substantially worse than pre-pandemic levels.
What do we expect to see? It’s difficult to say. At the time of writing, we are still waiting on the Chancellor to publish a ‘recovery plan’ alongside the Prime Minister’s ‘road map’ to exit lockdown. We know it will detail medium-term proposals to boost investment and skills but other than that, not much has been divulged.
What is clear is that in order for the UK economy to bounce back as quickly as possible measures have to be put in place to provide ongoing support for businesses. Even with the vaccination programme providing a light at the end of the tunnel for some, the challenge remains that, with the UK in a third lockdown, the current support packages are simply not enough to compensate for the severe, ongoing, economic impact of the pandemic.
It is by no means only retail, leisure and hospitality businesses that are feeling the pain, with the impact increasingly felt away from the sectors which have been most obviously hit by restrictions. Support must be in place for businesses throughout supply chains and across the economy. Personally, I would like to see business rate relief extended to all businesses whose ability to generate revenue has been severely impaired, whether they have been mandated to be closed or not. Supporting cash flow is key to business health and more cash grant support for the hardest hit, with a further extension on VAT deferral, would all be timely boosts to the bank account.
It’s difficult to criticise the support schemes that have been put in place. They have no doubt saved many companies and jobs so far, grant support, tax deferrals and in particular the Coronavirus Job Retention Scheme have all been welcome and, for some, have been lifesaving. While businesses understand that the nature of the pandemic means that things can change quickly, the Budget for 2021 must provide for a year-long plan to provide further support for those that have been impacted.
The current drip-feeds and cliff-edge approach to business support measures is also too short term and leaves businesses unable to plan. This inevitably damages confidence and forces companies to make short-term decisions out of necessity. The Job Retention Scheme clearly demonstrates this, and lessons must be learnt from the original furlough scheme end date in October, where the delay in extending the scheme helped drive redundancies to a record high of 370,000 in the three months to October 2020.
Throughout the pandemic, directors of limited companies have fallen into the gap between the Coronavirus Job Retention Scheme and the Self-employment Income Support Scheme (SEISS) because they take only a minimal salary and, instead, rely on company dividends for their income. Although there are technical challenges with this, the Budget would be an opportune moment to expand this support to cover company dividends as well as the PAYE salary.
How are we going to pay for this? Throughout 2020, questions were raised as to how the Treasury would pay for the record borrowing levels to fund the support measures. There is speculation the Chancellor is considering a substantial increase in Corporation Tax, raising fuel duty and making changes to National Insurance contributions and Capital Gains Tax, although so far nothing official has materialised.
While the fiscal challenges facing the UK are significant, the temptation to start fiscal tightening too early must be resisted to avoid prolonging the economic damage from COVID-19. If the recovery is stifled by tax rises or by a significant reduction in public spending it could have the perverse effect of making the Treasury’s financial position worse. A smaller economy will generate less revenue for the Exchequer.
Cutting off growth risks higher unemployment, less spending in the private sector and lower profits for businesses, which all mean there is less activity to tax. Instead with ultra-low borrowing costs, the focus must be on boosting economic activity to sustainably grow and broaden the UK’s tax base.
Billions have already been spent helping good businesses to survive this unprecedented crisis and to save jobs. Let’s hope this Budget delivers, and ensures businesses are not allowed to fail now.
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