Recovery doesn’t come cheap – we’re going to need a bigger Budget

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Continuing political unrest in the Middle East – and, with it, a real risk that furtherrises in an already high oil price could hold back any economic growth in Britain–means that Chancellor George Osborne has rather limited room for manoeuvre in his Budget, due to be announced later this month.

Osborne is putting on a brave face. At the end of February, he told an audience of small business owners in his Tatton constituency that the Budget would offer more help to businesses, that many of those present were “innocent victims” of the credit crunch and that there would be further steps to make it easier to do business.

The event was organised by the Forum of Private Business, which has already taken steps to help its members – owners of small businesses – on the road to recovery. Its Get Britain Trading manifesto sets out the conditions needed to help small firms grow and calls for improved banking sector transparency and more power for local bank managers to exercise discretion on loan applications. It claims to have received support from more than 200 small businesses in the first week following its February launch and to have received 1,200 visits to its website.

The forum’s chief executive, Phil Orford, said: “The signatories have been entering into the Get Britain Trading spirit by spreading the word and providing really useful hints and tips. By sharing goodnews and spreading some positivity, we hope to give a boost to Britain’s economy.” But he and his organisation have not been alone in offering advice to small businesses, upon which politicians appear to be pinning somuchhope as the vehicles for taking Britain out of recession.

For example, the Federation of Small Businesses (another pressure group representing this sector) has called on the Government to extend the National Insurance Contributions (NICs) holiday to existing firms to create an environment for job creation and to help stem high unemployment. The organisation welcomed the Government’s commitment for an NICs holiday for start-up businesses that take on up to 10 members of staff. But with unemployment remaining high, it believes this does not go far enough and must be extended to existing businesses.

It claims its research shows that 44 per cent of small firms would take on more staff if the Government cut NICs and adds that, as well as helping small firms with much needed cash-flow, the Treasury would also benefit from the creation of new jobs through income tax and employees’ contributions.

John Walker, national chairman of the federation, said: “Unemployment is worryingly high and with inflation above target, small firms cannot rely solely on the consumer for growth. Government must give a helping hand to small firms and create an environmentthat helps small businesses grow. While they have gone some way in helping newbusinesses take on staff, it needs to go further. The Government must extend the National Insurance Contributions holiday to existing small firms. As we have heard time and again, the Government is looking to the private sector to lead the recovery, but without the right measures in place, small firms are left without the tools they need for the job at hand.”

The growth message has also come over loud and clear from the employers’ organisation, the Confederation of British Industry. Newly-appointed director-general John Cridland has said the Government must clarify how it plans to encourage private sector investment in low-carbon energy generation, and how it will stimulate the supply of capital to fast-growing medium-sized companies, including creating a market for bonds.

Cridland said the Treasury should continue to focus on the needs of small businesses, particularly around regulation, bank lending and export finance, but he was concerned that mid-sized companies were not high enough on the Chancellor’s agenda.

For its part, the Institute of Directors, many of whose members are directors and/or owners of small and medium-sized businesses, last month put forward two dozen policy changes covering 10 areas of government policy which it said could transform growth prospects at little or no cost to the taxpayer over the period of the spending review. These “freebies” are a mix of immediate measures to boost private sector growth and long-term commitments aimed at creating a positive vision for the UK. The plan arises from the IoD’s concern that ministers are not doing enough, quickly enough, to improve the supply-side of the economy. The organisation is also in favour of stimulating growth through reducing both the higher rate of income tax and corporation tax rates.

The “freebie” measures include releasing green belt land for development to boost the construction sector; creating a genuine fast-track planning system for key national projects to boost the construction sector and replace ageing infrastructure; allowing local authorities who increase the total rateable value of properties to keep some of the increase in business-rate income so they have an incentive to boost private sector growth in their areas, but not allowing local authorities to set the level of business rates since this is likely to undermine growth; aiming the Regional Growth Fund at “winners” rather than “losers” so that, for instance, cities and clusters likely to yield the greatest returns on investment are targeted; introducing a minimum £500 employee deposit in employment tribunals to deter weak cases so that managers can focus on business growth; earmarking all future profits from the sale of state-owned bank shares for key infrastructure projects of national importance, particularly those transport and energy projects that are unlikely to proceed on the basis of private capital alone; and boosting confidence by making an explicit commitment to reduce the ratio of public spending to 35 per cent of GDP by 2020.

Miles Templeman, director-general of the IoD, said of the plan: “The Government’s deficit reduction strategy is central to improving growth prospects and the overall business environment, but the Government also needs to reform the supply-side of the economy to boost the private sector.”

However, while the Chancellor is reckoned to be sympathetic to many of the proposals put forward, tax accountants have little expectation of any major announcements or surprises. This is partly, as George Bull of Baker Tilly points out, a result of a continuing of the policy of pre-announcing or consulting on tax legislation changes. “Never before have we known so much, so far in advance of the Chancellor’s speech,” he said. The draft Finance Bill, published in December, outlined much of the proposed tax laws for this year and little tinkering with the detail is expected. Instead, the Chancellor is expected to provide more of an economic overview.

Andy White, of Carter Backer Winter, broadly agreed, but said: “The [SME] sector is very fragile and the Government is very concerned not to take any steps that might damage what they see as the base from which growth will come. They are desperate for the private sector to grow strongly to fill the public sector gap so, despite the fact that the country is still facing a severe debt crisis, I wouldn’t be surprised to see measures announced to boost the sector, although this will not of course amount to a tax giveaway as such.”

There could also be further crackdowns on tax avoidance and evasion, with the distinction between the two becoming increasingly blurred. And, according to White, there might be measures to curtail the use of Extra-Statutory Concessions, such as C16, which allows small companies to be informally wound up in a taxefficient manner.

The difficult balancing act facing the Chancellor and others involved in economic policy, such as the Bank of England’s Monetary Policy Committee, was acknowledged by David Kern, chief economist at the British Chambers of Commerce. But the organisation is clear that there is a need for radical Government action to boost business confidence and so encourage growth. David Frost, director general of the BCC, said: “Business is not seeking handouts but needs the Government to create a climate in which they can grow. That means less not more employment legislation, a greater focus on boosting British exports and keeping pressure onthe banks to ensure that businesses can access finance.

“We need to see the Government taking some pro-growth steps and delivering a Budget which boosts business confidence, encourages investment and rekindles the spirit of enterprise. If the Government provides a radical framework, business will do what it does best – creating wealth and jobs, innovating to deliver strong companies and providing the much needed growth for this country.”