This week’s Budget announcement will be a momentous one. The date has only recently been announced, adding to speculation about the timing of a General Election, and it looks set to be a particularly important speech for a number of reasons.
The government has come under increasing pressure for apparently over-optimistic forecasts. The European Union has criticised the Treasury for failing to grasp the severity of the risk posed by the deficit, and for a “lack of ambition” in tackling the public finances. At the same time, Bank of England policymakers have broken ranks to warn of the potential danger of a second fall into recession.
The government is faced with a conundrum. On the one hand the have to be seen to make plans to get the public finances in order. On the other, they are desperately seeking policies that will secure them votes in what looks set to be a very closely fought election – indeed, so close that many believe it could yield a hung parliament.
Businesses have already been warned that there will be “no giveaways” in the Budget. But what can small firms expect, and how will this affect the business environment over the coming year?
Reduction in public spending
It is inevitable that public spending will be cut during the next Parliament. The current government has pledged to reduce the budget deficit by 50 per cent over the next four years, and politicians on all sides have insisted that this should be achieved mainly through spending reductions.
This will have a significant impact on the increasing number of (small and medium enterprises (SMEs) that rely on public sector clients for income. The government has increased SME access to public sector tendering, and has pledged that every department will spend more of their budget with small firms. But this may be jeopardised by the forthcoming public spending cuts.
Tax rises - but which ones?
Taxes will have to go up if the public finances are to be repaired. But it is not expected that personal income tax will rise in the next Budget, and it would be politically difficult to raise other direct taxes.
Businesses look set to bear the brunt of tax rises. Firms have already been told that they will be subject to a 1 per cent rise in employers’ National Insurance Contributions from April, despite protestations from business groups. Most analysts do not expect to see a rise in corporation tax, although many expect that it will be bumped by at least 1 per cent at the beginning of the 2011/12 tax year. Capital Gains Tax may well rise in order to bring it closer in line with the new 50 per cent top rate.
The government has said it has no plans to increase VAT. But it seems certain that new anti-avoidance measures will be implemented, with loopholes being closed and HMRC chasing outstanding bills more aggressively.
The Budget will almost certainly contain measures to reduce unemployment, particularly among those aged 18 to 24. As well as being beneficial for the economy as a whole, this could help out small firms looking for an extra pair of hands. Many are calling for an extension to the existing apprenticeship schemes – schemes of which SMEs tend to be the biggest supporters.
It has been noted that a drive to reduce unemployment may be inconsistent with the planned increase in National Insurance. It is therefore not impossible that the NI increase could be postponed or scrapped.
More power for HMRC
As well as increases in the amount HMRC can take from businesses and individuals, the agency is likely to see more powers conferred on it. As well as increasing anti-avoidance measures in law, the government looks set to give HMRC more freedom to set interest rates charged on outstanding tax payments. Rules on rebates may also be tightened, for example making it more difficult for firms to claim VAT payments from HMRC during their first year of registration.
Of course, all of the plans set out in the Budget may be jeopardised by the outcome of the General Election. If there is a change of government, we may see fiscal policy change significantly. That said, the Conservatives would enjoy no more political leeway than the current government, given the severity of the deficit and the difficulty of direct tax increases.
Generally speaking, businesses should be prepared for a wholesale fiscal squeeze over the coming years. Inflation may also rise, although the risk of spiralling interest rates looks to have been averted, at least temporarily. Firms should also avoid counting on a straight-line increase in consumer confidence. Many analysts believe that a second peak in unemployment is imminent, and this could have a disastrous effect on consumer spending.
Simply Business will be covering the Budget throughout the day.