Guy Ropes

So the Chancellor stuck to Plan A, eliminating the deficit by 2015, coming as little surprise to us anoraks. With fiscal policy having been set for the course of Parliament during last year’s CSR and emergency budget, there wasn’t a whole lot of room for manoeuvre in this year’s budget. From the start, his speech was going to be far from the 4hrs 45mins speech Gladstone gave to the house in 1853. But it presented our hard-pressed Chancellor with the opportunity to engage in a media relations exercise by announcing a series of positive measures that would dominate headlines the next day.
What caught the headlines?
Most newspapers went with the cut of 1p in fuel duty, a deferral of 1p plus inflation duty rise scheduled for April and a promise that fuel taxes would not rise so long as the price of oil did not fall below $75 a barrel. Although a surprise and welcome relief to motorists, it pales in comparison to the rise in NI contributions and cuts in departmental and local council grants set to kick in next month and newly announced measures to link direct tax rates to the lower Consumer Price Index.
The cut in corporation tax from 28% to 23%, set to be the lowest in the G7, over the course of the parliament was a positive pro-business headline. Arguably because the bank levy had been adjusted upwards to neutralise any such tax cut for the banks and the decision to bring down the 50% tax rate had been put on the back burner. A cool calculation designed to head off criticism of the Tories as a party of the rich.
The impending return of WPP was a coup for the coalition; the marketing giant has reportedly been enticed back from Ireland with the prospect of a lower 5.75% tax on overseas earnings. Although rumours are circulating within communications consultancy circles that the move was a cynical ploy to secure a key communications contract with the government.
It would be unfair to brand the entire budget as an exercise in PR, it does contain a seemingly impressive list of pro-growth measures that have been developed in consultation with key business groups and think tanks. Aside from the corporation tax and reform of foreign earnings taxation, the budget centred on a number of targeted measures to nurture the growth of SMEs, some of which were flagged up in the previous blog entry. The most prominent are:

- A three-year memorandum exempting businesses employing fewer than 10 staff from new domestic regulation.
- The creation of 21 Enterprise Zones in potentially high-growth areas which offer high-speed broadband, up to 100% discount on rates (capped at £275k over 5 yrs) and relaxed planning rules.
- Expansion in the Enterprise Investment Scheme, increasing the qualifying threshold to companies with 250 employees and assets of up to £15m. To entice venture capital, the level of investment permitted under the EIS has been raised from £2m to £10m with a rise in tax relief from 20% to 30%.
- A rise in R&D tax credits for small businesses to 200% from April and 225% next year.
Is this a budget for growth?
Previous budgets have been presented amidst much fanfare and hubristic claims so this month’s one will be in good company. Putting aside the questionability as to how far governments of advanced economies can influence growth trajectories over the long run, in the short run the proof will be in the pudding; at this stage it would be premature to make such claims on the budget’s efficacy.
For much will depend upon the demand side too; if the private sector has little faith in the economy then businesses will hoard cash, pay down debt or pay out dividends from the proceeds of the tax cuts and lower regulatory compliance costs instead. As has been the case over the past couple of years. So it will really be a matter of hoping consumer confidence picks up now.
JR

As the 2011 budget draws ever closer, the country waits with bated breath to see what Osborne has to offer at the dispatch box during these gloomy times.

Although media attention is on the goodies Osborne may offer come next Wednesday, he will in all likelihood stick firmly to October’s Comprehensive Spending Review and refrain from lavishing us with too many handouts so expect these to be few and far between. A fuel duty stabiliser? Perhaps, but more probable is a delay in the 1p (plus inflation) duty rise for April pencilled in by the previous Labour government.

At the heart of the budget will be a growth strategy with a particular emphasis on measures designed to support SMEs. If the Tories’ spring conference is anything to go by we should expect it to be the “most pro-growth Budget this country has seen for a generation”. The rhetoric of Cameron’s speech, which unsurprisingly sparked a furore in Whitehall, points to small businesses (not the export sector this time) as the supposed driver of Britain’s economic recovery and bureaucrats as the ever malign influence which “concoct those ridiculous rules and regulations that make life impossible for small firms”.

It shouldn’t come as a surprise though. The coalition took a good kicking from Labour last October, having failed to come up with a white paper on growth, it wasn’t helped earlier this year when Richard Lambert, the outgoing CBI Director-General, strongly criticised the government for its lack of a growth strategy. The narrative of a Tory-led government bent on ideological and reckless cutting has started to take hold among the public and for the first time opinion polls show diminishing faith in the coalition’s economic policies. Former economic advisor and FT commentator Ed Balls, who took over the shadow chancellorship from Alan Johnson in January, has proved to be a formidable opponent having done well to project this image over the past couple of months.

If the coalition partners are going to get through this parliament united and stand a chance of reaping the electoral dividends of their stewardship, they will need to paint a rosy picture of a dynamic economy that sits neatly besides their deficit reduction agenda. And with revised ONS figures showing a 0.6% contraction in the economy during the fourth quarter of 2010 and spending cuts now starting to bite, it is particularly important that the coalition weaves a “good news narrative”.

With little to play with, we can pretty much rule out any substantial injection of funds but rather a tinkering with existing regulations and the tax system. So here are some of the more likely measures…

Firstly, Osborne may act on the interim report from the Office of Tax Simplification published on the 10th March. Having been taken to the task of reviewing small business taxation, thought to be particularly byzantine and time consuming to navigate, the OTS has come up with a number of ambitious recommendations. One of which is to reform National Insurance Contributions, merging it with Income Tax so as to create one transparent tax. It is not a new idea but a radical one which has managed to elude many previous governments. Although a herculean task, it shouldn’t be written off just yet, it would certainly be a badge of honour that Osborne could pin on his lapel. If there is one lesson to be drawn from the first 10 months of coalition rule it this - the government has a radical streak. Most political commentators could never have foreseen the upheaval in welfare provision and the NHS initiated by Messrs Smith and Lansley respectively.

Another such possibility is that small firms may become subject to less stringent employment laws as part of the coalition’s deregulation drive. Leaked sections of the budget outline how small firms with less than 10 employees will be able to bypass employment legislation and directly negotiate maternity and paternity deals with its staff. However it may be too optimistic to expect that the leaked proposals will make it to the final draft in its entirety as the Lib Dems have been showing signs of discomfort. A distinct possibility is that an exemption may be granted to small firms to the new employment laws which are due to come into force next month. This will see fathers using up to six months worth of maternity leave left unused by the mother who chooses to return to work early. Afterall the Federation of Small Businesses has been pretty vocal about the changes, believing them to be onerous which discourage small firms from taking on more staff.

It seems very likely that the budget will also herald the return of enterprise zones, a scheme which takes it precedence from that of the Thatcher era in which businesses were offered simplified planning rules and discounted business rates amongst other concessions to operate in impoverished regions. The aim is simple, to foster the growth of small businesses and encourage firms to flock to the region, and so turn the fortunes of areas with historically high unemployment rates around.

Lastly, the coalition may choose to beef up the existing Enterprise Investment Scheme. The scheme in its current form offers individual tax breaks to those investing up to £500,000 in businesses that have assets totalling a maximum of £7 million and a workforce of no more than 50. The coalition could raise the 500k cap and/or permit investment in companies with more assets and a larger workforce. Such a measure could be funded by a reduction in tax breaks for Venture Capital Trusts which have proved increasingly unpopular over recent years.

Expect Wednesday to be a field day for the opposition, not only will Labour pick at the measures to portray the budget as a cynical exercise in PR but also to point to the budget’s growth forecasts which in all probability will have been revised downwards. Given that the recent OECD forecast revised the UK’s growth down to 1.5% for 2011-12 and 2% for 2012-13, it seems untenable for the government to stick to the previous ONS forecast of 1.9% and 2.6%.

Next Wednesday will prove a testing moment for the coalition as it attempts to push its growth agenda; after last October’s fiasco the government will have to be seen to be taking the initiative this time round.
JP