This is the most
aggressive budget I have witnessed in my lifetime. At £ 155billion, or 11% of
GDP the UK faces the highest budget deficit of the G20 leading economies. It is
essential that the deficit is tackled as quickly as possible. The UK has already
borrowed over £925bn, or equivalent to almost 65% of GDP, and this will grow over
the next four years despite the government’s attempt to erode the structural
deficit. The annual interest repayment
on this debt is currently £42bn per annum, which is equivalent to the entire
education budget. With the potentiality for this to reach £70bn quickly, this clearly needs to be tackled, and we can’t risk letting it
swell and cripple future public finances.
It is a double hit – not only will the net debt
increase faster if we do not tackle the deficit now, the interest payments will
actually increase as bond markets reassess UK plc risk. Even marginal changes in
this assessment will have a huge monetary impact on the public sector finances,
and so it is essential that we take the tough and responsible decisions
now.
The challenge is huge and complex, but necessary.
Fiscal tightening itself is only one aspect of the challenge, and just as
essential is the need to rebalance the economy towards the private sector, in
order to give it a sustainable footing for growth. Outlining a clear plan for
tax and spending changes was essential, and as part of this, a clear message to
business and the private sector was necessary to provide the positive incentives
and confidence that is so necessary at this point in time. Moreover, the only
sustainable way to achieve growth is to promote private sector growth and
private sector jobs.
As an entrepreneur, with much experience of
running my own businesses through past recessions, I believe that the Coalition
government needed to act responsibly, in an objective fashion, and make tough
decisions that were necessary. In the corporate world, for a business
experiencing overwhelming and increasing debt, and declining revenues it would
be entirely normal to respond by cutting costs and spending. The general
consensus is that this is necessary for the UK plc, but the sticking point is
about how, and at what speed.
Whilst we are not Greece, its example exists as a
warning to us of the consequences of delaying action until tomorrow, which could
have been taken today. Delaying the necessary and inevitable action has never
been the right thing to do, especially when we are facing so many uncertainties,
such as a weak Eurozone, and a threatening second financial shock emanating from
this region. I believe that the risks in delaying action are greater than the
risks of doing as much as possible now. It’s a bit like managing your household
expenditure; when you are living beyond your means it becomes necessary at some
point to reign in your spending, and to take the necessary action as soon as
possible.
The challenge is real and the simple fact is that
there isn’t enough money to continue with the levels of spending that we have
been used to over the past decade. Every aspect of government activity will be
reviewed, and the effects of the budget cuts will have an impact on the lives of
everyone in the county. To save off a potential double dip-recession, however,
the Budget needed to set out a clear message to business that the tax changes
will be supportive of entrepreneurism and investment, then the private sector
will bounce back and drive the recovery.
The Verdict
The largest component of the fiscal tightening
will come from spending cuts, with departments expected to lose 25%+ of their
budgets by 2014/15. The consensus amongst all governments now is that
bureaucracy has become oversized, expensive and inefficient. Cutting
departmental spending by an average of 20% was necessary, and it will force them
to operate at acceptable efficiency levels. This is one aspect of our need to
rebalance the economy. It needed to be done in such a way that adverse effects
will be kept to a minimum, and this is why the government has chosen to freeze
pay and look at the unpopular but necessary pension contributions – as a means
to minimize immediate direct job losses.
In terms of unemployment and jobs, the austerity
measures in the budget are likely to result in higher short-term unemployment.
However, if the government can instill confidence in business and encourage
investment in the private sector, then the jobs market will begin to pick up
over the medium-term, as the private sector recovers more strongly. It is
necessary that this happens, and in the medium- to long-term, facilitating a
vibrant private sector is the only way to do this. Investment in new
technologies and the UK’s engineering future is also one aspect that will help
this. One additional policy to counter this problem is the expected Conservative
policy of exempting new businesses from Employers' National Insurance on the
first ten employees they hire in the first year, which will apply to most
non-London regions. Policies like this, and the resistance of NIC increases for
employers are consistent with the Coalition’s emphasis on creating private
sector jobs, as it will reduce overheads and not disincentivise
hiring.
In terms of tax rises, the government cannot leave
anyone out of the net, and whilst many decisions are tough, they are necessary
evils given the scope of the fiscal challenge, and the need to be ‘fair’ and
make the budget fly.
Take CGT for example; clearly, this is
a bold decision by the Government to raise it to 28% because it will affect both
the more affluent and the business community, and essentially an increase on
those who are needed to invest in the private sector, create jobs, and who will
ultimately drive the recovery. Nevertheless, when you are staring down the
barrel of a £155billion deficit and a swelling debt burden, tough decisions need
to be made. In previous recessions, I have also faced similar dilemmas where
sensitive and unpopular decisions that affect the people you rely on have had to
be made. I always remember to ask myself what the consequences of not acting
are.
Looking at VAT,
it is historically a low hanging fruit, and it no surprise to see it increased
to 20% from next January, which Osborne expects to raise approximately
£13billion per annum by 2014/15. However, at 17.5% it is already at the top-end
of UK acceptability. Moreover, from a business perspective, it hits SME’s much
harder, as they do not have the reserves to absorb the practical and admin costs
of implementing pricing and accounting changes. Changes last year are believed
on average to have cost £1500 per business to implement. The Government need to
think hard about the impact this is going to have on SME’s. SME’s employ
59% of the private sector workforce in the UK, with
many facing low profits, this increase could endanger many businesses that are
struggling to survive.
The promise to
suppress the NIC increase on employers (the so-called jobs tax), by raising the threshold for employers,
is part of the overall message that the Coalition is attempting to make,
that it is serious about creating a business friendly environment in the UK. So
to, is the decision to reduce the overall level of corporation tax by 1% per
year from 28% to 24% - part of the message that ‘Britain is open for business.’
Cutting the SME level from 22 to 20% will be help to address the above problem.
Moreover, in addition to the extension of the enterprise credit guarantee
scheme, the reduction in corporation tax will be a huge relief to companies with
poor cashflow. The extension of
the £10,100 CGT allowance for the first £2million to £5million of lifetime
earnings is a major incentive to entrepreneurs to create value in their
businesses, and is a clear message to entrepreneurs that their efforts are
valued.
Overall, from a business operational perspective,
the tax policies are quite well balanced, and send the correct message that the
Coalition is doing all it can to make running a business in the UK as
competitive as possible. Further incentives of keeping the cost of employing
people low are also promising.
The fiscal tightening will undoubtedly affect both
short-term economic growth and job prospects, but I believe that configured in
the way the budget has set out, the private sector is being given the best
chance to lead the recovery and put the economy on a sound footing looking
forward.
My Advice to
Business
My message to entrepreneurs has repeatedly been,
when the going gets tough, and it will, then the tough need to get tougher.
Businesses need to look at their own operations, and reflect deeply on their own
cost base, profit margins, and the various activities of the business. They need
to look at their budgets over the
next 12 months and make the necessary plans and provisions to absorb the impact
that the budget will have on them and
more importantly, make the necessary changes in their plans.
Essentially, we, like the public sector, also need
to do better, and deliver more for less. Two practical examples of this are that
any business that we are doing which is at a low margin and therefore
inefficiently wastes effort for little reward, needs to be cut; there will
simply be no room for complacency. Secondly, as the public sector is taking a
pay freeze, both in direct terms and increased pension contributions, we as
business leaders need to consider implementing the same measures with our
employees if our budgets are tight. Nobody wants to make people redundant, and
so if ways can be found to negotiate with staff, and implement similar freezing
measures, then this must be considered.
My point is that there is no point in business
leaders bemoaning the cuts, and every need for them to take the essential
actions to remain viable business models – the onus is on us. As an
entrepreneur, you need to be objective about the environment that you find
yourself in, and adjust to it. We also
need to reconsider our pricing, and look at what aspects can be passed on. We
also need to look at the changing costs of doing business and focus on the areas
that make positive contributions, and find ways to create value in response to
changing demands.
This advice is not complex; it is about critical
and reflective attitude change, and the most successful will yet many business
leaders will be the ones who make the changes. It is this positive business
attitude that we need to adopt, if
business is going to drive UK growth. Businesses that do not show such resolve
will find the coming years extremely, perhaps existentially difficult. I am
confident however, that the majority of UK businesses will make such changes,
and many have already shown exceptional introspect.
