Budget June 2010: Business and economy

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We examine some key highlights affecting business and economic policy, including reaction from ePolitix.com members.

• The government aims for the structural current deficit to be in balance by 2015 and debt to be falling as a percentage share of GDP
• Spending cuts will account for 77 per cent of deficit reductions, while 23 per cent from tax rises From 4 January 2011 VAT will be raised to 20 per cent
• The corporation tax rate will be cut by one per cent per year for four years, from 28 to 24 per cent and the small firms’ rate will be cut to 20 per cent. Capital and investment allowances will be reduced, but this will be delayed until 2012
• Capital gains tax to be raised to 28 per cent for higher rate tax payers
• A bank balance sheet levy will be introduced from January 2011 to eventually generate over £2bn annually
• From April 2011 the employer national insurance contributions threshold will rise by £21 a week above inflationary rises
• The income tax personal allowance will be increased by £1,000 to £7,475
• For the next three years the first £5,000 of national insurance contributions will be waived for the first ten employees of new businesses outside London, the South East and the East of England
• No rises in alcohol, tobacco or fuel duty – alcohol and fuel duties, including air passenger duty, to be considered in the autumn
• Part of Royal Mail to be sold off to raise investment capital
• The government will implement the recommendations of the Dyson review into R&D tax credits and expand the enterprise finance guarantee scheme
• The government will publish a white paper on tackling regional economic differences in Britain later in the summer, followed by a paper on rebalancing the economy of Northern Ireland
• The government will create a Regional Growth Fund to provide finance for regional capital projects over the next two years

Member Response: British Retail Consortium director general, Stephen Robertson

On VAT

British Retail Consortium director general Stephen Robertson said: "We didn't want a VAT increase. It'll hit jobs, consumer spending, the pace of recovery and add to inflation but we accept the government has no easy options.

"It's some consolation that the range of VATable products isn't being extended.

"Changing computer systems and shelf prices on tens of thousands of products is a huge, costly exercise for retailers. Planning for catalogues is a particular nightmare.

"The start date, in the middle of the busy and crucial post-Christmas sales period, will be difficult but retailers would rather have more notice than less. Six months to prepare is better than the rise coming-in this summer.

"Retailers will work hard to implement the increase smoothly but there must be a light-touch to enforcement at the time of introduction."

On public spending cuts

BRC Director General Stephen Robertson said: "The government is right to prioritise substantial cuts in public spending over tax rises. It has to cut spending which cannot be fully justified and get more from every pound it raises.

"The chancellor is right that private sector businesses are the engine that will drive growth. To restore the public finances to health the government must deliver an environment that encourages private sector investment. Tax increases do the opposite."

On National Insurance

BRC director general Stephen Robertson said: "The coalition's increases will do less damage than the previous government's plan but it will still undermine retailers' ability to maintain and create jobs. The government clearly accepts NI is a ‘tax on jobs'.

"The exemptions for new businesses will be useful as they start trading. This is the time in their development when they are most vulnerable and most in need of help."

On corporation tax

BRC director general Stephen Robertson said: "Lowering corporation tax will support private sector investment and entrepreneurship. It also sends a positive message to the rest of the world that the UK has a competitive tax system which makes it a good place in which to do business.

"But reducing capital allowances for plant and machinery will hurt retailers' cash flow. Like manufacturing, retail is a capital intensive sector. Taking more money from retailers will hit investments. Anything which tips the balance against plans for marginal stores should be avoided. However the delay in introduction until 2012 is welcome.

"Retailing is key to town centre regeneration. It revitalises communities by creating jobs and promoting economic growth. Protecting incentives for investment in retail-led regeneration brings widespread benefits."

Member Response: Council of Mortgage Lenders director general, Michael Coogan

"We knew today's Budget would be hard-hitting across the piece, so it is no surprise that housing has not escaped. We understand the tough choices that the government has to make - but obviously that does not mean they are attractive.

"In a world of imperfect choices, steps that help the economy to recover and help to maintain mortgage rates at affordable levels for most people are the measures that will underpin a healthy housing market in the long term. But in the short term pain is likely, as the effect of tax rises on household finances dampens the already fragile recovery in house-buyers' confidence, housebuilding is affected, and support for housing costs across all tenures is curtailed.

"In housing terms this may be the "age of aspiration" as the housing minister said recently, but against an austere backdrop there is a long way to go before the supply of housing, or the ability of would-be home-owners to achieve their aspiration, are likely to show any significant pickup."

Member Response: Phil Orford, chief executive, Forum of Private Business

"I think many small business owners will be pleasantly surprised by today's Budget.

"Not only did the chancellor make all the right noises about supporting enterprise and smaller businesses, he backed it up with a number of crucial tax changes.

"The 1 per cent reduction in small companies' tax is obviously more than welcome – it's something we and the SME community have long called for. It also represents a 2 per cent cut in real terms as the previous government had planned to increase small companies' tax by a further percentage point.

"The rise in CGT had proved controversial with business owners ever since the idea was first put forward, but the 28 per cent rate is a gentler increase than many people were expecting. More importantly, the rise in the entrepreneurs' relief threshold to £5 million is more than we could have hoped for and it should ensure that most small business owners aren't penalised too heavily when they come to sell their companies."

Mr Orford added: "The moves to limit rises in National Insurance, introduce NI exemptions for some new employers and raise the income tax threshold were also positive, even though they were watered-down from the Conservatives' original pre-election promises.

"What we need now is are some guarantees on how the white paper on local economic growth Mr Osborne mentioned will focus on innovation and jobs in regions that are likely to be affected by public sector job cuts.

"We will also be lobbying the government to make sure the ‘fuel price stabilizer' Mr Osborne referred to becomes a reality. Extortionate petrol and diesel prices represent a huge inflationary problem for smaller firms and could threaten recovery if left unchecked."

Member Response: Steven Law, President of R3, the insolvency trade body

"The increase in VAT starting in January next year will be a further blow to those struggling businesses that rely on consumer spend, making spending more expensive at a time when consumers are already tightening their belts. Retailers and restaurants, especially, will find themselves between a rock and a hard place as they struggle to work out what will damage their bottom line more: taking on the extra tax burden or suffering an inevitable fall in consumer demand if they pass the tax on.

Companies that are VAT registered but work predominantly in the business to business sector are less likely to suffer as they can claim back any VAT they pay from HMRC."

Member Response: Julie Patterson, director of authorised funds and tax, Investment Management Association

"We welcome the Government's commitment in the Budget Report to consult with the industry on further improvements to the UK's fund tax regime. Over recent years positive steps have been taken to modernise the UK's fund taxation regime. However in the light of European regulatory developments, more needs to be done. We look forward to working with officials further to enhance the competitiveness of the UK funds industry.

"In order to compete more strongly for fund domicile business, the UK needs to offer tax transparent contractual vehicles and to abolish the fund-specific and very low tax-generating Stamp Duty Reserve Tax regime. The UK could then capitalise on the growth opportunities being created by the UCITS Directive, which enables master-feeder funds to be marketed across Europe, and the Alternative Investment Fund Managers Directive, which is leading non-EU funds to consider relocating to Europe."

Member Response: Michael Ankers, chief executive, Construction Products Association

Whilst there may be some relief that the chancellor did not make further cuts in capital spending from those already announced by the last government, the impact of what is set out in this Budget should not be underestimated. In 2014/15, capital spending will have fallen by a third since 2009/10. At this level it will be very difficult to maintain the built environment of this country in its current condition. As the chancellor acknowledges the government will need to be very careful in making choices as to how this capital is spent in order to make sure that it is focused on those projects, such as transport and energy, that will most effectively contribute to the economic recovery.

In other Budget measures, the Association welcomed measures to create an environment in the UK that helped business succeed. 'We welcome the plan to reduce corporation tax as well as measures to help small businesses at a time when they are facing enormous pressures. We had, however, hoped for positive steps to ensure credit is more widely available at competitive rates, especially from those banks that are substantially in public ownership.

One of our major disappointments is that the Chancellor has done little to stimulate the low carbon agenda. A VAT increase was widely anticipated but we hoped that he might have tempered this by updating and expanding the list of those products and solutions that will improve energy efficiency in people's homes such as more efficient heating systems and double glazing. It seems perverse that at a time when government wants to be seen as 'the greenest ever, it should continue to set a VAT rate of 5 per cent on the energy that we consume, but an increased rate of VAT on the means by which people can reduce their energy usage.

Member Response: London First chief executive, Baroness Valentine

"We have pressed the government to protect capital spending on infrastructure, and to prioritise spending which has the highest economic impact. The chancellor has committed to both, although sticking to the previous government's capital spending plans still means significant cuts.

"Nevertheless, spending targets are tough – there’s every incentive for the whole of the public sector to look for efficiencies and for programmes which may have seemed attractive when times were good, but offer insufficient value now, in order to protect spending which has strong economic impact. There ought to be an increased role for the private sector in helping government to deliver these savings and it’s all eyes on the Autumn spending review."

TAX

"The chancellor’s balance of roughly 4:1 between spending cuts and tax rises seems about right to us. He has seized upon VAT as the least worse tax rise and, reluctantly, many business leaders would agree with him. It is broad-based, so raises the maximum amount for the Taxman with the least impact on competitiveness. Retailers will welcome the notice period, so re-pricing can be done as efficiently as possible. A clear direction of travel on corporation tax is welcome but we would have liked to see a commitment to reduce the 50% higher rate of income tax, if only as an aspiration at this point."

BANKING LEVY

"The levy on banks is a worry. London’s agglomeration of international financial and professional services companies brings huge benefits in employment, investment and tax revenue. If the levy on bank assets provides another reason for these companies to reconsider their presence in London, it could be a very expensive mistake. How other G20 countries deal with the same issue remains crucial to this being effective."

Member Response: Unite joint general secretary, Derek Simpson

"Osborne and Cameron's talk of financial Armageddon is not because they have the solution to the deficit but to scare the British people into accepting the biggest attack on essential services for a generation. Today the mask slipped to reveal this government for what it is - Tory slashers of services and friends of the rich and powerful.

"Where is the promised fairness in cutting the wages of needy households yet fighting shy of closing the tax loopholes which allow the wealthy to dodge their duty to this country? And increasing VAT is reckless - it will stop people spending, harm UK business and choke off the recovery.

"This Budget is vintage Thatcher. The Lib Dems have been conned into hammering the poor, choking off investment and cuts that risk plunging this country into a longer and deeper recession. If they do not disassociate themselves from this, then the Lib Dems will have to bear the responsibility."

Member Response: CMI chief executive, Ruth Spellman

"There is, however, a fear that many of the proposed cuts will see arbitrary swinging of the axe across management levels, with little thought about the consequences. Yes, there have been too many examples of catastrophic leadership failures across the private sector and the NHS, and the government is right to act now before more bad management costs lives. However, the desire to cut costs should not just be about imposing random reductions at management level. Now is the time to focus on removing managers whose capabilities fall below the first class standards that the consuming public have a right to expect. We need answers about how costs can be cut without cutting corners, and that enable us to invest in high quality managers who can drive the necessary public sector reform agenda."

Member Response: Local Government Association chairman, Dame Margaret Eaton

"This is a very tough Budget that will have far-reaching effects. Councils provide vital front line services upon which millions of people rely. Ministers need to recognise that council services such as adult social care and safeguarding children are as important to residents as services such as education and health when the government makes detailed decisions on spending in the autumn.

"Councils are in the vanguard of reforming the public sector and will work with the government to ensure that savings will be made by pruning out the maze of quangos, middlemen, bureaucratic funding streams and audit arrangements, rather than salami slicing services that the most vulnerable people depend on. We need nothing less than a transformation of the way the public sector works to deliver savings by giving power to the people who know their areas best.

"Town halls are the most efficient part of the public sector and have led the way taking difficult decisions to deal with the financial crisis. They have already made significant savings, and have already made it clear that they are unable to offer staff a pay rise this year.

"Councils work hard to keep council tax down, and are looking to government to confirm that the proposed tax freeze is paid for from savings outside local government such as central government marketing and consultancy."

Response: Stephen Hughes, partner, health division, Bevan Brittan LLP

There will be a huge sigh of relief that capital project spending will be maintained. The greatest challenge will be how to deliver that spending more efficiently. How can hard pressed public organisations procure and contract more effectively?

Much will be made of the VAT increases and the reform of welfare. While a public sector pay freeze was widely expected, what will not be mentioned is the challenge the entire public sector faces in transforming the workforce against a backdrop of extensive reductions in departmental budgets. Departmental budget cuts of up to a quarter will be devastating to the delivery of public services relative to today. A reduction of 20- 25 per cent over the next four years is the considerable and unavoidable figure. As ever, the devil will be in the detail, of which we have seen little so far, but such reductions represent the start of turbulent times and significant challenges for all public sector bodies.

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