Pre-election Budget: More Political Than Economic?

A topline analysis of the March Budget and what it means for UK business

The last budget before the general election has come and gone – a budget, which it  must be said, has generally left businesses with more questions than answers.

Unsurprisingly, the budget – as they tend to be just prior to an election – contained a great deal of political rhetoric and not a great deal of financial detail.

As a result, businesses are left wondering how exactly the government – should it be re-elected – will tackle the UK’s massive deficit. Businesses are left wanting greater clarity on what public sector spending cuts are to come.

A strong indication of stability was required from the budget, so businesses can make decisions without worrying whether the rules are going to change. Businesses would also have been looking for signs of fiscal competitiveness for the UK.

There is a genuine sense of cynicism from business leaders over this budget, with many believing there will simply be another after the election.

Reed Finance Divisional Director, Tim Vye, comments: ‘Clearly, this was a fairly neutral budget, with the package of measures amounting to just a fraction of one percent of GDP. With an election around the corner, it always had the potential to contain more politics than economic policy.

‘The biggest concern we hear from our clients – large and small – is their anxiety over the UK deficit.

‘Whilst arguments are thrown amongst the political parties about how fast and when to cut, most employers simply want one clear message – so that they can form business and hiring plans accordingly.

‘Nevertheless, many of our clients seem to have broadly welcomed this modest  package of new initiatives – in many cases, precisely because it did not contain any “bombshells”,’ Tim Vye adds.

What was in the budget for SMEs?
The Chancellor Alastair Darling announced a package of measures to support the growth of the grassroots economy, including £45bn of additional lending for small and medium-sized businesses from state-controlled banks Lloyds and Royal Bank of Scotland.

Further competition on the high street, as new banking licenses are awarded, should make it easier for small firms to have greater access to credit than has been the case recently.

While additional bank lending is welcomed, there remains scepticism about the lending targets – and the key question is ‘Will the finance be affordable?’ If it isn’t, the new lending initiative will make very little impact.

The Chancellor is creating a Small Business Credit Adjudicator to help SMEs previously unfairly denied credit by the banks. The Adjudicator will work closely with a newly enhanced Business Link Financial Intermediary Service, to ensure that small businesses are treated fairly when applying to their bank.

The Adjudicator will be given statutory powers as soon as possible to ensure that the judgments it makes are enforceable, but how will this work? Does the creation of an independent Adjudicator mean banks will in effect be forced to hand over cash when they don’t believe it is the right thing to do?

The Chancellor also says extra support will be provided to small businesses by extending its Time to Pay scheme for the whole of the next parliament. The extra time will help businesses settle their tax bills over a longer period, but the danger is that the scheme merely puts off paying a bill companies simply cannot afford.

Also announced was the creation of a one-off £2.5bn growth package to help small businesses, national infrastructure and key skills. It will be subsidised by taxes on bank bonuses and by switching spending from within existing allocations – and is a clear attempt to nurture SMEs through to the upturn in the economy.

Further good news for smaller companies came with the Chancellor’s pledge that the government will increase the number of contracts awarded to small businesses by 15%, and his announcement that business rates will be cut, so that 345,000 small firms will pay nothing.

The additional 15% of contracts headed to smaller businesses will mean that central government will pump an estimated £3bn of extra cash into the sector, and £15bn across the wider public sector.

Meanwhile, there will be no increase in capital gains tax rates for companies or individuals.

Tim Vye adds: ‘The £2.5bn of measures designed to help smaller businesses (especially the cut in business rates), has been welcomed amongst many of our clients.

‘We were already seeing encouraging signs before the budget though; with an upturn in ‘newly-created’ positions being placed with Reed Finance since the start of 2010 (in particular, the requirements for strong, commercially-focused business analysts have increased significantly).

‘We have seen employers across most industry sectors, become increasingly confident with their hiring plans for 2010 – often displaying much higher levels of optimism than many media commentators suggest.

‘Our clients have certainly welcomed the absence of any further changes to Income Tax, National Insurance or VAT. For many finance professionals, implementing such changes is often seen as an unnecessary ‘distraction’ from their core day-to-day business.’

And for businesses in general?
The Chancellor confirmed that from 2011 there will be a one percentage point rise in NI (a plan that had been announced previously), which will affect all those who earn £20,000 or more. Many small business leaders will have been left disappointed this hike was not shelved – or at least SMEs removed from this hike – as it could lead to thousands of job losses or the stifling of new job creation.

There was also confirmation of the 50% tax rate on earnings over £150,000. As a result, the UK will have the second most expensive tax regime for senior executives among the G20 countries, behind only Italy. Time will tell whether this will lead to a brain drain of the UK’s top talent and influence where companies decide to locate their top executives.

In an effort to make the UK more attractive for wealth-creators and innovators to set up their own businesses, Darling announced a doubling of entrepreneurs’ relief for capital gains tax from the first £1m to the first £2m of qualifying gains made over a lifetime.

Proposals for restricting the higher rate tax relief on pension contributions were also confirmed. The changes were labelled ‘complex, confusing and bureaucratic’ by The Chartered Institute of Personnel and Development (CIPD).

As expected, the Chancellor did not outline public spending cuts to reduce the country’s £167bn deficit, because the government believes any cuts will hamper economic recovery.

Alastair Darling did however reveal that a third (c15,000) of London’s civil servants would be relocated to rural areas to save money. Public sector organisations were urged to make efficiencies – but no details were offered – leaving businesses to doubt whether the government has a credible plan to reduce the deficit going forward.

If the London-based civil servants retain their London wage, it is difficult to see where the savings will actually come from, by keeping their current wages, regional pay rates become distorted.

Public sector pay will continue to be frozen for top earners and government will endeavour to ensure that public sector pay awards in general are not higher than 1% from 2011. A new Code of Practice was announced and the government is asking all public sector organisations to explain publicly, how they will comply with the code by the end of the year.

No new announcements were made around pension reform. The two main questions will continue to be whether the public sector can continue to attract talent and whether the government needs to go further to trim costs?

The jobs guarantee for young people was extended until March 2012, from March 2011. This will allow all 18 to 24-year-olds to be entitled to training or a job if they have been out of work for over six months. There were no such announcements or guarantees on behalf of older workers, although the Chancellor did reveal the government is considering scrapping the default retirement age (DRA) or at least raising it.

The cost of providing pensions is growing and the main ways to avoid a burden on future taxpayers include lower benefits, higher personal savings, higher individual pensions contributions and a later retirement age.

Employers are going to have to give careful consideration to managing different generations in the workplace and they will perhaps need to reassess the role a traditional pension scheme plays in the overall employment deal.

The national minimum wage will rise 2.2% later this year, bringing it up to £5.93 an hour. This moderate increase recognises that many businesses are struggling, while also helping to protect jobs at a time of rising unemployment. Some unions have called for inflation-busting rises, but this could have hit firms hard and may have put some lower-paid workers out of work.

Meanwhile, the government is to create a ‘green investment bank’ complete with £2bn of assets, to encourage private sector investment in renewable energy, which could create thousands of jobs. This move will be a long-term project.

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