Chancellor George Osborne today served the British people a very bitter pill indeed. Widespread cuts to public services, major reductions to benefit payments, significant tax increases, and a downward revision of UK growth forecasts have combined to create something rather unpleasant.
In today’s Budget announcement (his first since taking office), the Chancellor told Parliament that a raft of spending cuts and tax rises is necessary in order to deal with the “economic inheritance” the new government faces. It says it must take action now in order to reduce the deficit and restore confidence in the British economy.
Opposition politicians, along with many commentators and analysts, see it rather differently. They believe that cutting spending to the degree proposed today produces a serious risk that the economic recovery could be stalled. They believe that much of the deficit will be made up through natural expansion, and that the poor will be hardest hit by the proposals. Markets also responded less than enthusiastically, with sterling at the FTSE both falling.
But regardless of political arguments, today’s Budget has serious implications for British businesses. Some of these implications are positive, some may be harmful.
Small businesses will benefit from a reduction in the Small Profits Rate of corporation tax from 21 per cent to 20 per cent. This applies to firms with profits not exceeding £300,000. The standard rate of corporation tax will be reduced to 27 per cent next year, with further 1 per cent reductions in each of the following three years.
The planned rise in employers’ National Insurance Contributions (NICs) will not go ahead. Instead, the threshold for employers’ NICs will rise by £21 per week above inflation. New businesses outside London, the South East and the East will receive a £5,000 exemption from NIC payments for their first 10 employees.
The headline rate of VAT will be increased from to 20 per cent from 4 January. There will be no change to zero-rated and exempt items.
Capital Gains Tax
The headline rate of Capital Gains Tax rises from 18 per cent to 28 per cent from midnight, but only for higher rate taxpayers. This is a rather softer blow than that which had been widely predicted. Entrepreneurs’ relief at 10 per cent will be extended from the first £2 million of gains to the first £5 million.
Manufacturing allowances and relief’s
The Annual Investment Allowance will be reduced to £25,000 a year, with the intention of targeting support to smaller firms. Capital allowances will be reduced for plant and machinery from 20 to 18 per cent. Allowances for assets held for longer periods will be cut from 10 to 8 per cent. These changes will not take place until April 2012.
There will be no increases in cigarette, fuel or alcohol duties, although the Chancellor signified that rises may follow in the future. As previously announced, the planned 10 per cent increase in cider duty will be scrapped.
A range of regional transport projects were given the go-ahead, despite cost concerns. These include the Manchester Metrolink extension, Birmingham New Street redevelopment, and the Tyne and Wear Metro, as well as improvements to train lines to Sheffield and between Liverpool and Leeds.
Budgets for non-ringfenced departments will be cut by 25 per cent over four years, with potentially major implications for SMEs and contractors that provide services to the public sector. There will be no further reductions in capital expenditure beyond those already planned by the previous government.
In addition to the measures directly affecting businesses, the Budget also contained a widespread reduction in benefit payments. Public sector pay will also be frozen, and it is expected that the reductions in public spending will result in thousands of job losses. These are likely to have a knock-on effect on consumer-facing businesses.
Today’s Budget seems likely to define the coming Parliament. This government will stand or fall on its ability to deliver the Budget’s proposals, and upon their efficiency in bringing the deficit down. But George Osborne’s speech will also have much more tangible effects on UK businesses – and these effects will be felt immediately.
It is not all bad news for Britain’s small businesses. Reductions in corporation tax and an increase in the employers’ NIC threshold are to be welcomed. But UK’s business owners should be braced for choppy waters ahead, as public sector unemployment rises, and sales are hit by a hike in VAT.