Subrahmaniam Krishnan-Harihara, Head of Research at Greater Manchester Chamber of Commerce, reviews the Budget Speech.
Almost exactly a year ago, Chancellor Rishi Sunak presented his first Budget with a pledge to usher in the post-austerity age and boost investment in infrastructure and innovation. On the day the Chancellor presented his first Budget, the UK less than 1,300 Covid-19 cases overall. Between then and today, when the Chancellor stood up to present his second Budget, there have been an additional 4,185,000 Covid-19 cases in the UK. Since March 2020, the UK debt has gone up by over £300 billion and the national economy contracted by 10%. Also, since his first Budget, the Chancellor has made four separate fiscal interventions to shore up the economy, businesses and jobs. What a 12-month period has it been! And what backdrop for a Budget!
Against that backdrop, the Chancellor delivered a set of measures that offer certainty to business and soften the impact as they restart after Covid restriction, unlock busines investment and set a framework for infrastructure investment by creating a UK Infrastructure Bank. The Chamber of Commerce network’s main asks from the Budget were extension of Coronavirus support schemes, avoiding immediate business tax rises, and securing stronger incentives for business investment. The Chancellor deserves congratulations for delivering on these asks.
Business support
The Government's roadmap out of Covid-19 strictions envisages a full easing of restrictions in late June. Even if the roadmap goes to plan and there is no significant change to the public health situation, it is likely that restrictions on some sectors will remain until autumn, maybe even into 2022, meaning businesses will still be reliant on Covid-19 related support throughout this year. Businesses of all sizes and from all sectors have placed a high degree of reliance on one or more of the Covid-19 support measures that Government has provided. Greater Manchester Chamber's recent Covid-19 and Brexit impact survey offers enough evidence for this. The Chamber's Covid-19 Recovery Tracker survey series also showed that the Coronavirus Job Retention Scheme or furlough was by far the most popular support scheme. It is, therefore, good news that the Chancellor has confirmed an extension to the furlough scheme to September 30th, although a tapering system will kick in from July. Alongside the extension to furlough, business rates relief and grants for eligible businesses will continue. This vital extension will ensure that businesses will not face a cliff-edge as they start the journey to picking up lost trade.
Help to Grow
Badged as an initiative to bridge the productivity deficit, the Help to Grow scheme aims to offer management training, technology advice and discounted access to digital technologies and software in an attempt to give SMEs some competitive advantage and acquire services that are widely available to larger businesses. There have been previous attempts such as the Growth and Innovation Fund, which have had mixed success. Data gathered as part of the GM Skills for Growth project that Greater Manchester Chamber is involved in indicates that many businesses are looking to upgrade the skills of their managers particularly in the context of the pandemic and new working practices. Sufficient details about Help to Grow are not yet available but to have real impact, it must complement other labour market and skills initiatives. There is enough evidence that technology adoption increases productivity and programmes like this can benefit SMEs to improve business processes and increase revenues. Crucially, SMEs also need access to high-speed, affordable broadband. What is needed, therefore, is a holistic programme that incentivises SMEs to adopt technology along with government investment in fibre broadband infrastructure and emerging technologies such as 5G. Reliable and scalable digital infrastructure is the enabler for high-speed broadband and business adoption of technology; they go hand in hand and cannot be separated.
Housing
In his summer statement last July, the Chancellor announced a fourfold increase in the stamp duty threshold from £125,00 to £500,000. The stamp duty holiday has now been extended by three months to June 30th. In another measure to support the housing market, the Chancellor has also offered a mortgage guarantee scheme under which first time buyers can obtain a mortgage with a 5% deposit. Government will partially underwrite the remaining 95%. These are measures that will certainly grab headlines but whether they have real impact is less certain. While they will allow banks to make more risky loans - loans they would probably not grant without the government guarantee, they may not make buying a house any cheaper. For one, these measures could increase demand and push up house prices further. Moreover, first time buyers account for only a third of housing transactions and the mortgage guarantee will not help all house buyers. Secondly, these measures are directed at the demand side. The challenge in the housing sector is not lack of demand but lack of supply. Increasing demand without taking concrete measures to increase supply is not going to yield results bar one macroeconomic measure: house prices get a boost.
Public Finances
Having been forced into an unexpected fiscal stimulus and facing mounting national debt, the Chancellor has set a framework for repairing public finances. Apprehension about the cost of Covid-19 related support measures and potential tax rises have been around for some time. The Chancellor has been facing calls from his party colleagues to make the case for fiscal prudence and chart a course to paring down public borrowing, which is now almost equal to annual UK GDP. The Tory manifesto for the 2019 general election promised a triple lock on tax rises: income tax, NIC and VAT would not increase under this government. That left three levers for fiscal consolidation: corporation tax. capital gains tax and freezing personal income tax thresholds, unless the Chancellor wanted to start decreasing public spending or introduce a new levy, both of which would only render him and the Prime Minister rather unpopular. Of the three levers, the Chancellor put into gear two: personal income tax thresholds will be frozen until 2026 at £12,570 for the basic rate and at £50,270 for the higher rate. This means, people will pay more tax as their incomes increase. Second, the Chancellor has now announced an increase in corporation tax to 25% starting 2023. Despite the proposed increase in the headline rate of corporation tax, smaller businesses with profits of up to £50,000 will only pay the current 19% rate. The super-deduction will also offset the corporation tax raise. In the long-term need to balance the books, this tax raise is of the 'drop in the ocean' kind. Additional measures will be needed and announced, especially as the economy starts to recover and GDP grows towards pre-pandemic levels. More difficult choices will present themselves and some tough decisions will have to be made.
Unlocking Business Investment
The new “super-deduction” tax relief policy could indeed help encourage businesses to invest and attract more foreign direct investment into the UK. Under the scheme, eligible capital investment projects can benefit from a 130% deduction in the year of investment. The two-year scheme comes into effect in FY 2021-22 and will unlock business investment to expand capacity and increase productivity.
The Chancellor's predicament going into this Budget was evident: how would he ensure continuing support for businesses while keeping rating agencies, some economists, and a section of Conservative voters happy by signalling his intention for fiscal consolidation. That being the case, this Budget was always going to be the most delicate of balancing acts. It brought some good news and certainty for anxious business owners and managers, not least for those in the worst affected sectors. Greater Manchester Chamber of Commerce and our many business members welcome the Chancellor's updated Plan for Jobs, and his commitment to deploy HM Treasury's full "fiscal firepower" to bolster the economy. Undoubtedly, recovery from the worst economic shock the UK has ever faced must remain top priority. For the medium- to long-term, the Chancellor has laid a marker in the sand. We hope the UK Infrastructure Bank will lay the foundation of levelling-up the UK and addressing longstanding regional inequalities.