Osborne backs business but faltering growth needs action

Simon Nias
Wednesday, April 10, 2013

While the coalition's efforts to tackle the tricky subject of welfare reform have been filling column inches ever since last month's Budget, the lack of significant debate on the more important task of helping business and getting the economy moving again is indicative of the fact that the chancellor probably did just enough in this department to avoid opprobrium.

Yes, there were a few missed opportunities such as the failure to halt the business rate rise, but given the backdrop of a persistently high deficit, sluggish economy and ongoing crisis in the eurozone, it was surprising to observe the amount of wriggle room that the chancellor found.

Since his first (emergency) Budget in June 2010, George Osborne’s trips to the despatch box have been dominated by the language of austerity; but while his fourth Budget was never going to be a giveaway, the chancellor found enough money (largely by demanding a further £2.5bn in spending cuts from government departments) to give businesses some much-needed support.

Decisions such as the scrapping of the September fuel duty increase, a further boost to R&D tax credits and cuts to both corporation tax and employers’ National Insurance Contributions (NICs) have all been welcomed by business owners and organisations for easing the immediate burden. Longer-term infrastructure plans, due to kick off from 2015, will hopefully provide opportunities for businesses going forward.

The headline news was the £2,000 reduction in employers’ NICs and a further 1% cut in Corporation Tax from April 2014, both of which have been widely welcomed.

In announcing the NIC cut, Osborne said he was taking "a tax off jobs", and although the measure won’t come into effect until next year, it was welcomed by everyone from the BPIF to the CBI.

The further 1% cut in Corporation Tax will lead to three years of consecutive tax cuts, with the 28% rate inherited from Labour already scheduled to fall to 24% from this month onwards and 21% from April 2014; and the new cut planned to kick in from April 2015, when the UK will have a Corporation Tax rate of just 20%, making it the lowest in the G8.

However, the chancellor drew criticism from the Forum of Private Business (FPB) for failing to take action on business rates. FPB head of policy Alex Jackman pointed out that business rates, linked to inflation, have now risen by 13% in three years. "Business rates have risen so much in just a few years they are the number one enemy to many small firms," he said. "It’s disappointing to see no action here – it was the obvious way to relieve pressure and is a missed chance for quick relief for business."

Yet despite doing his best to promote investment in the UK, which he again declared was "open for business", the reality facing the chancellor is that more than four years after the collapse of Lehman Brothers the economy is on life support. The sovereign debt crisis in the eurozone, the UK’s largest trading partner, rumbles on and few would hold out much hope of the rot stopping at Cyprus – the latest member to be bailed out. UK growth remains sluggish, although the latest quarterly data from the Confederation of British Industry (CBI) suggests that the chancellor will at least avoid the ignominy of a triple-dip recession.

Perhaps worst of all, from the chancellor’s perspective, the UK has lost its coveted triple-A credit rating. While shadow chancellor Ed Balls is widely thought to have missed the boat in terms of effectively criticising Osborne on that one, he didn’t pass up the chance to leap on the latest Office for Budget Responsibility (OBR) figures and accuse his opposite number of creative accounting in maintaining the downward trend in government borrowing.

According to the OBR, government borrowing in 2012/13 stood at £120.9bn, 100m down from £121bn in 2011/12. But Osborne has since admitted that some bills had been delayed until the next financial year, meaning more savage spending cuts or tax increases will be needed to achieve the government’s aim of eliminating the deficit by 2015.

The most inconvenient truth facing the chancellor and his cabinet is the government has failed to get to grips with the shortfall in business lending crippling the economy for the past four years. The latest initiative to tackle this – the Funding for Lending Scheme (FLS) – has by the government’s own admission done little for business customers and has been focused on mortgage lending.

While the government clearly recognises the need for action – and has committed to looking at ways to adapt and improve the FLS, there is a feeling this can’t come soon enough.

Meanwhile, the update on the Business Bank provided by the department for Business, Innovation and Skills has detailed some of the areas on which the government will focus its investment (see page 4), but revealed that the bank will not launch until the second half of 2014.

OPINION
Businesses welcome Budget but rates still issue for SMEs

Alex Jackman, head of policy, Forum of Private Business,
We’ve been calling for a scheme like the reduction in employers’ National Insurance Contributions (NICs) for a number of years now, so our only disappointment with this is that it’s 12 months away, and that’s a mighty long way off. While business will love the concept, the fact that no financial benefits will be felt until April 2014, takes the shine off it somewhat. Still, it will enable businesses to prepare and plan ahead.

The bottom line here though is that this initiative will have a double function: to either incentivise employers to take on more staff, or to take the saving and boost their profitability. For many small firms that have been operating on extremely small margins, the latter would be welcome relief. And for businesses looking to grow, it means they’ll be able to employ an additional employee earning £22,400, or an additional four employees working full time on the adult minimum wage without any increase in their employer NICs. That’s got to be good for employment figures and therefore the wider economy.

The chancellor was also spot on with the fuel duty freeze. No one wants to see fuel prices any higher than they are, and small businesses will welcome it. Let’s not forget though that prices are fast approaching record highs – any increase would have been reckless so this was just basic common sense.

We still feel the government needs to implement some kind of fuel stabiliser. The only way we’re going to see anything approaching a fair price for fuel in the UK will be via a mechanism that works to bring fuel tax down when prices are high. Such a system would mean prices as they stand now would not be hovering just shy of £1.50 and taking money from the pockets of consumers better spent elsewhere in the economy.

Ask any small businesses what they wanted to see from this Budget and many will have said: ‘action on business rates’. We said before the Budget, government couldn’t keep clobbering businesses with hike after hike, and unfortunately we haven’t seen that sentiment acknowledged today by Mr Osborne.

It was really a case of ‘enough already’ years ago, and April’s increase which now goes ahead as planned will mean rates have spiralled by a mammoth 13% in just three years. There aren’t many businesses who’ve seen income increase by anything close to that figure with sluggish growth and recession to contend with in the same period.

Business rates have risen so much in just a few years they are the number-one enemy to many small firms, and we believe they are a big part of the problem with our high streets too. It’s disappointing to see no action here – it was the obvious way to relieve pressure and is a missed chance for quick relief for business.

There was enough in the chancellor’s speech to keep business happy – for now anyway. But it’s just a sticking plaster if growth doesn’t really kick in for another year. Pressures for cost reduction will keep piling up until the economy sees some real growth. While we welcome the measures in here for short-term help, longer-term worries remain, and unfortunately, once again, a lot will rely on what happens in Europe and beyond in 2013.

READER REACTION
Will the Budget make life easier for printing businesses?

Mark Nelson, director, Compass Business Finance
"I feel there is little in the budget that is going to have a significant impact to print businesses. The Business Bank’s objective is to get additional lending quickly to their target areas of newer and high-growth businesses, but how they do this is far from clear. I think the only area that will be of interest, and potentially help increase investment momentum, is the increase in capital allowances for the next two years. This is reliant on making taxable profits in the first place, but it could make all the difference."

Tony Rafferty, chief executive, Printing.com
"Three years ago, the progressive cuts to Corporation Tax persuaded Printing.com to develop its TemplateCloud and W3P software platform. Now we are generating revenue from three continents and adding to UK job creation. Today’s rate cut adds to the attractiveness of basing technology businesses in UK. For UK PLC to succeed, start-ups need to move on and take the ‘second’ step. Helping businesses to move on from being a ‘sole trader’ to an employer is something that should be encouraged."

David Mitchell, founder of Astron and former Bezier chairman
"The change to employers’ National Insurance Contributions is good, but there is no sense of political leadership or direction and until that comes, then it is more of the same I’m afraid. Borrowing is now £356bn more than we were told we would have two years ago and the cuts in non-value adding public sector seem a spit in the ocean compared to the growth in national debt. We need bold, decisive leadership now, not a penny off a pint of beer; we need focus on getting things moving."

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