Chancellor Alistair Darling has slashed economic growth forecasts for next year from 2.75% to between minus 0.75% and minus 1.25%, but in a series of measures he said he'd inject an extra £20bn into the economy. Find out the changes and industry comment.
Alistair Darling, the chancellor, gave a confident if uninspiring performance in this pre-budget speech which should have been more accurately described as a mini-budget. There were few surprises, as many of the proposals had already been leaked in the preceding days, although the number of measures announced was unexpected.
Opposition parties criticised Darling saying that his fiscal stimulus is widely seen only to work for countries with low rates of public borrowing and said only huge tax increases in the future would pay for the measures.
"The scale of the fiscal stimulus is what the IoD has called for, but we have considerable doubt that the 2.5 percentage point reduction in the VAT rate will stimulate consumer spending as much as the Chancellor expects," said Miles Templeman, director general of the Institute of Directors (IoD).
"Fiscal stimulus in the short term needs to be matched by fiscal restraint in the long term. The best way to restore the public finances is to restrain public spending instead of increasing taxation. The proposed 45% income tax rate will raise little. It is more about messages than about economic reality. Anything that potentially harms our competitiveness is a danger. The first sector of the economy to be dismayed at this proposal will be the City of London, which is already under pressure from foreign financial centres," he added.
Points in brief
National insurance
The main points for companies is that while there were announcements to boost cash available to them, the complete fiscal stimulus package will be paid for by a leap in National Insurance contributions from both employees and employers in 2011.
To pay for a spending budget that will go over the £1 trillion mark for the first time, Darling announced a 0.5% increase in NI contributions for those earning over £20,000 per year for both companies and individuals. This is expected to raise £5bn per year.
Income tax
The other way to boost returns to the treasury include an increase of the tax rate to 45% for those earning in excess of £150,000 per year, while fuel duty will also rise to offset the cut in VAT. In response to this, Ben Wilkins, HRS director, speculated that, "This could have a real impact on industries where there are more opportunities for talent to mobilise and move elsewhere - for example, knowledge-based industries such as technological or financial services. As a result, UK companies that rely on hiring high-earning talent will have to think increasingly about how to attract top performers."
In theory the benefits to business include getting rid of the planned increase in corporation tax, exempting charges on empty commercial premises, promising companies as long as they need to pay tax, national insurance and other bills.
Corporation tax
"The commitment to delay the rise in corporation tax from 21p to 22p in the pound for small businesses is welcome, particularly at a time when these businesses are under extreme pressure," says Mary Monfries, head of tax services for entrepreneurs, private companies and private clients.
While Darling welcomed RBS bank's move at the weekend to keep overdraft charges for SMEs static for at least a year and warned that he would take whatever action was necessary to make other institutions follow suit, there were no concrete proposals apart from a new committee made up of public groups to monitor retail, mortgage and small business lending.
Cash available
However Darling did announce that the European Investment Bank had made £4bn available to UK banks to support British businesses and seven institutions had already applied for £1bn. In addition the government was providing a temporary loan pot of £1bn for SMEs and another £1bn for exporters through the Export Credit Guarantee Department.
"It is also important to recognise the real difficulty for many small businesses, which is access to credit," said Templeman. "Systems of loan guarantee are in place, and we welcome the announcement that the government will consider possible improvements, but these facilities need to be easier to use. We look forward to the new schemes to provide finance directly, but again these need to be straightforward if they are to be effective."
VAT
The widely-expected reduction of VAT from 17.5% to 15%, worth up to £12.5bn to the treasury, has been criticised as ineffective. With retailers already slashing prices on goods, it is unlikely that the reduction would be felt by consumers.
Nevertheless commenting on the announced VAT cut from 1 December, Mike Bailey, UK head of indirect tax at PricewaterhouseCoopers, observed: "The change should not only affect retailers and consumers but will also be welcomed by financial institutions who are unable to recover VAT and will therefore see a reduction in their cost base."
But others see problems with its implementation. CODA, supplier of finance systems to 25% of the UK high street, today warned of the confusion the cut in VAT will cause for retailers and consumers in the run-up to Christmas.
Following discussions with its retail customers about implementing the 2.5% cut in VAT, CODA found that many believe it will cause more problems than it solves at a time when they are already discounting heavily. Among the concerns cited were:
"It is clear from talking to our customers that many are unprepared for this change which comes into effect from Monday," said David Turner, group marketing director at CODA. "They usually have months to prepare for this kind of thing and test the associated systems, but introducing it at this time of year will cause a huge amount of confusion. Retailers generally 'lock-down' their systems in the run up to Christmas, to avoid the risk of IT failures in their busiest trading period. Although the VAT changes are simple enough to make within the accounting system, there are other complications."
Foreign dividends
There were other indications that Darling was aware how important it would be to regulate UK business, especially the financial sector in the future. However he did try to make the UK a more attractive place to foreign investors by announcing a tax exemption on foreign dividends.
Justin Hamer, a partner in the tax department at international law firm Paul, Hastings, Janofsky & Walker, said: "I think that this announcement will be an eminently sensible move. The UK is out of line with the majority of European jurisdictions and this will increase the attractiveness of the UK as a location for companies. While it is welcome, the truth is that it has been too long in coming."
Elsewhere the differential first-year rates on new cars will go ahead in April 2010 but older cars will only see duty rates increase by maximum of £5 from next year. In 2010 the maximum rise will be limited to £30 per car, rather than £90.