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Sunak’s ‘spend big now, tax big later’ Budget

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More than 20 million people around the UK have now received a first dose of the Covid-19 vaccine, marking the fourth-highest vaccination rate worldwide. The UK government aims to extend coverage to everyone over 50 or at risk by 15 April and all adults by 31 July. It paves the way for Prime Minister Boris Johnson’s new four-step “roadmap” to ease England’s lockdown. On Monday 8 March schools reopened and outdoor recreational activity was somewhat extended – all restrictions are scheduled to lift by 21 June, which will drive a rebound in consumption and output over the year.

Overall, the UK economy is forecast to be weaker in the short-term, but recover quicker than previously predicted. The UK economy is now forecast to expand by 4.0% in 2021 (down from 5.5%), according to the Office for Budget Responsibility’s (OBR) revised annual GDP forecast, but then return to its pre-pandemic size by Q2 2022, six months earlier than forecast in November 2020. UK GDP will rebound by 7.3% in 2022, up from 6.6%, according to the OBR. This outlook is the net effect of Chancellor Rishi Sunak’s Budget, the consequences of the third national lockdown, and including evidence of the UK’s economy’s increased resilience to restrictions (e.g. Q4’s 1% GPD growth).

Sunak’s Budget (see summary here) aims to help the UK economy to recover from the pandemic, and transform post-Brexit, over the next five fiscal years. At best, the policy choices are mixed for the business environment, with short-term investment incentives offset by medium-term corporate tax hikes to pay for the further £65bn outlay in stimulus to support businesses through the next phase of the pandemic. In summary, Sunak’s five-year plan can be characterised as ‘spend big now, tax big later’. The first phase is based on the government’s stimulus policies to support economic recovery. However, the second phase, aimed at restoring public finances, will ultimately be shaped by the actual outcome of the pandemic’s evolution, and economic performance as well as business and household consumption and investment.

In the ‘spend big’ phase, the new Recovery Loan Scheme (RLS) aims to support only those firms able to take on new leverage with finance to support cash flow, investment and growth. Lenders are required to back 20% of credit risk and will also undertake credit and fraud checks and weigh up existing company debt burden to mitigate the risk of zombie firms, fraud and default. Interest and fees on facilities must also be paid upfront by borrowers. The RLS launches on 6 April and will be available until 31 December 2021, subject to review. It will provide up to £10m in up to three-year overdrafts and invoice finance and up to six-year term loans and asset finance facilities.

Alongside the RLS, Sunak’s investment in the UK business sector recovery includes the extension of the furlough scheme to the end of September (capping unemployment at 2.2 million, or 6.5%, by the end of 2021), the reduced 5% VAT rate for the hospitality sector, and a new “super-deduction” for business investment. The latter policy allows companies to offset 130% of investment spending on eligible plant and machinery against profits. This, in effect, incentivises business investment through a significant subsidy for a strictly limited two-year period. It will likely bring forward companies’ future investment plans, particularly in the manufacturing sector, to stimulate economic recovery at an annual cost to the Treasury of £12bn. This will attract many corporates eager to kick-start their business growth plans as the economy reopens. The OBR has stated that the policy could boost business investment by 10%, or around £20bn per year. The subsidy will also support industrial and logistics real estate demand and potentially stimulate sale and leasebacks of real estate assets to raise finance for investment. However, corporates must weigh up the competing demands for balance sheet capital and corporate resources as the economy reopens. Any decision to accelerate business investment in the next two years will require close scrutiny of balance sheets. For example, some corporates will have to prioritise deferred taxes, loan interests and other liabilities ahead of ambitious new investment. BTG Advisory is well placed to support corporates capitalise on the new policies available in the context of their specific circumstances. 

The flip side of Sunak’s Budget – the restoration of public finances – reflects a precarious balance between providing viable businesses with a lifeline back to self-sustainability while safeguarding against the danger of zombie firms, as well as ensuring the UK is internationally competitive post-Brexit. These competing priorities have produced policy compromises. Faced with a spiralling public deficit, Sunak has chosen to tax, rather than return to the kind of austerity that characterised his predecessor George Osborne during the financial crisis period, which inevitably restricts the UK’s post-Brexit competitive ambitions as well as the “levelling up” agenda.

First, Sunak froze income tax thresholds for four years from 2022, raising £8bn a year by 2026. Second, he increased corporation tax by six percentage points to 25% from April 2023, raising £17bn in the 2025–26 fiscal year. These tax increases represent a decades-long reversal in policy direction. However, it is possible – maybe – that this unwanted policy could be withdrawn or watered down in a future Budget if the UK’s economic performance improves on the current revised expectations. That is, in a bullish outlook, if the UK’s recovery outperforms the OBR’s forecasts for GDP, employment which, ultimately, allows the government to spend less, Sunak may be in a position in two or three years to scale back or even scrap the planned corporate tax increases. On the contrary, in an underperforming scenario, if GDP and employment undershoot and required spending is higher, further tax rises may be necessary to balance the books. The key is the economy’s actual performance over the next two years.

Whatever the direction the UK economy takes, the government may also extend policies and add new incentives to businesses to further stimulate economic growth. In the later phase of Sunak’s five-year plan, this will become increasingly likely as we approach the next General Election. Therefore, companies should carefully consider the timing of their own investment decisions and not rush to capitalise on what is presented as a limited-time investment subsidy window.

If your firm would like tailored advice on how to prudently scale your business and capitalise on the government’s new Budget policies while keeping a vigilant eye on near and far liabilities, do get in touch with us today. We look forward to helping.

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