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The 2021 Budget from Chancellor Rishi Sunak provided the Conservative vision for the re-building of the UK economy post-pandemic. We look at the key points for corporate businesses.
Chancellor Rishi Sunak is naturally fiscally cautious, but these are extraordinary times, and as we near the anniversary of the first national lockdown, the Chancellor has had to balance the short-term need for a continued support package with a longer-term picture of how the Government will seek to balance public finances again.
The OBR (Office for Budget Responsibility) now expects a “swifter and more sustained recovery” than predicted back in November 2020. The growth rate for 2021 is now expected to be the fastest the UK has experienced in almost 50 years, with output expected to recover to pre-Coronavirus levels by the middle of next year – 6 months earlier than previously expected.
The significant upgrade in the OBR forecasts will be a relief to many, and is helpful for the Government, vindicating their strategy of a vaccine-led recovery and requiring fewer tax rises.
However, in his assessment of the public finances, the Chancellor struck a cautious tone. He is all too aware that these forecasts could change again - volatility, a possible rise in interest rates or an unpredictable new Coronavirus strain could all slow the UK’s recovery. Additionally, in 5 years’ time, the OBR still expects the economy to be 3% smaller than it would otherwise have been.
OBR and Barclays GDP forecasts
How does the OBR produce its forecasts?
The OBR was created in 2010 to provide independent analysis of the UK’s public finances. It is tasked with producing detailed five-year forecasts for the economy and public finances twice a year, which accompany and inform the Government’s key fiscal events.
The OBR uses a large-scale macroeconomic model for the production of its economic forecast, which is jointly maintained and developed by the Treasury and the OBR. It works with various Government departments to gather numerous separate forecasts for different categories of revenue, spending and financial transactions, which it then collates and uses to generate aggregate forecasts for spending and tax receipts and for the various measures of public sector borrowing and debt.
As anticipated, the Chancellor spent a large proportion of his statement setting out continued support for businesses and individuals to take the UK through the remaining stages of the pandemic.
Coronavirus Job Retention Scheme
Protecting jobs and livelihoods remains a top priority for the Chancellor, and as such many of the support measures announced related to this. Given that the furlough scheme has protected 11.2 million jobs since the pandemic began, the extension announced by the Chancellor for a further 5 months to the end of September has been broadly welcomed across sectors of the economy.
Employees will continue to receive 80% of their current salary until the scheme ends, but employers will be expected to make a contribution towards the cost of unworked hours from July.
This extension of the scheme well beyond the planned end-date for all Coronavirus related restrictions in mid-June is an attempt to avoid a ‘jobs cliff edge’. It also aligns with the Government’s cautious approach in its plans to unlock and, perhaps, fears that a new virus strain could knock the UK off course.
The Government has also announced an extension to the Self-Employment Income Support Scheme to September 2021 and has expanded the scheme to include the newly self-employed who have recently filed a tax return for 2019-20.
To support those currently without a job, the Chancellor announced that the incentive payments for firms hiring apprentices will be doubled to £3,000.
£7 million will be allocated to a new ‘flexi-job’ apprenticeship programme in England that will enable apprentices to work with a number of employers in one sector. There is also an additional £126 million for 40,000 more traineeships in England.
Recovery Loan Scheme
Rather than extending the CBILS and CLBILS loan schemes, the Government has announced a new Recovery Loan Scheme, which will begin from 6 April 2021. The Scheme will provide lenders with a guarantee of 80% on eligible loans between £25,000 and £10 million, and will be open to all businesses, including those who have already received support under the existing Covid-19 guaranteed loan schemes.
Barclays has advanced over £27bn to clients through Government loan schemes to small businesses, large corporates and institutional clients.
Grants and VAT cuts
The Government is also targeting additional support to those sectors of the economy that will need to wait longer before they can reopen.
£300 million has been dedicated for a culture recovery fund, while another £300m is being ring-fenced for sports clubs.
For the hospitality and tourism sectors, the business rates holiday will continue until the end of June and business rates will be discounted for the remaining 9 months of the financial year, whilst the reduced 5% rate on VAT has also been extended for these sectors.
To further support the high-street – which has taken a significant hit during the pandemic - a new ‘Restart Grant’ will provide up to £6,000 per premises for non-essential retail and up to £18,000 per premises for hospitality, accommodation, leisure, personal care and gym businesses, to help them plan ahead and reopen in the coming months.
Finally, to continue supporting the housing market, the Government has announced a tapered extension of the stamp duty holiday until 30 September.
The Chancellor also announced a new mortgage guarantee scheme set to begin in April 2021. The scheme will provide a guarantee to lenders across the UK who offer 95% mortgages on homes with a value of up to £600,000, in an attempt to help first time buyers make it onto the property ladder after low-deposit mortgages largely disappeared as a result of the pandemic.
Including measures announced in the last Budget, the Government’s Coronavirus support measures are now worth £407 billion in total. The Chancellor was keen to emphasise the Government’s unprecedented response to protect jobs, keep businesses afloat and help families get by, whilst also making the case for Conservative principles allowing the Government the fiscal freedom to act when it needed to.
Despite this, the Government does not believe the state should be borrowing to pay for public spending in normal times. Taking a business-like tone, the Chancellor made clear that the current levels of borrowing – the highest they have been outside of wartime – are not sustainable.
The Chancellor announced two measures to begin work to rebalance the Budget.
The first is a freeze in personal tax thresholds until 2026, with income tax, national insurance and VAT also all frozen.
The second is an increase to the rate of corporation tax on company profits to 25% from April 2023 – a steeper rise than many expected. This is deliberately timed to come into effect after the point at which the OBR expects the economy to have fully recovered.
It also seeks to protect small businesses, with the rate for small profits under £50,000 remaining at 19% and a taper for businesses over £50,000 so that only those businesses with profits over £250,000 will be taxed at the full higher rate of 25%.
As an offer to potentially offset against this and to encourage investment to drive growth, the Chancellor also unveiled a ‘super-deduction’ tax break, to allow firms to reduce their tax bill by 130% of what they spend on investment in qualifying new plant and machinery assets. The OBR predicts this measure could boost investment into the UK by up to £20 billion.
We can expect to hear more on the details behind these proposals when the Government publishes consultations related to tax measures on the 23 March.
However, it is also clear that there is more to come from the Government on taxation and rebalancing the books in the future, when the UK is past this final stage of the pandemic. The Chancellor acknowledged the scale of the challenge to return to any sense of economic normality, and if he goes ahead with a second Budget later this year, it might mean more difficult choices.
As well as setting out plans for continued Covid support and taxation to support this, the Chancellor used the statement to provide a vision for the future post-Coronavirus economy.
Investment in green industries
Ahead of the COP26 conference in November this year – which the UK is hosting for the first time – the Chancellor announced the first ever UK Infrastructure Bank, to be launched in the Spring and located in Leeds.
The Bank will invest across the UK in public and private projects to finance the green industrial revolution, with an initial capitalisation of £12bn.
Building on the Government’s announcement of a Sovereign Green Bond in November, the Chancellor also announced a new retail savings product to give UK savers the chance to support green projects, and underpinning all this, an updated monetary policy remit for the Bank of England to reflect the UK’s transition to net zero.
Read more about our Green Solutions, including Green bonds, guarantees and indemnities.
This Government’s ambition to increase productivity pre-dates the Covid crisis. However, the Chancellor’s announcements to help businesses become “more innovative, competitive and profitable” reflect the changes to society resulting from the pandemic.
The new Help to Grow management scheme will offer a UK-wide management programme to upskill SMEs in the UK, whilst the Help to Grow Digital scheme aims to help SMEs develop digital skills and adopt productivity-enhancing software, enabling them to take advantage of the increased use of digital channels.
Becoming a ‘scientific superpower’
One of the Government’s ambitions for post-Brexit Britain is to become a leading centre for science and innovation, and the UK’s leadership in vaccine development and rollout has focused more attention on this.
To continue in this vein, the Chancellor announced more funding to continue the vaccine rollout and to increase future preparedness for different strains.
More broadly, to further the Government’s ambition for the UK to be the best place in the world for high-growth innovative companies, the Chancellor announced plans for visa reforms to attract highly skilled migrants, including a new unsponsored points-based visa.
The Chancellor also welcomed Lord Hill’s UK Listing Review, published earlier in the day. The Review was commissioned by the Chancellor last year and makes recommendations to reform the current listing regime to further enhance the UK’s position as an international destination for equity listings.
One of this Government’s slogans during the last election campaign, ‘levelling up’ the different regions of the UK has been often talked about in this Parliament, but has undoubtedly become more of a challenge for the Government as a result of the pandemic.
In his Budget, the Chancellor said that for him, this is about creating a different economic geography, and so announced a new economic campus based in Darlington and led by HM Treasury and the Department for Business, Energy and Industrial Strategy.
He also announced eight locations for new freeports^ – special economic zones with different rules to make it easier and cheaper to do business, with tax cuts and simpler planning rules. These are spread geographically across England:
Talks are ongoing with the devolved governments to agree further freeports in Scotland, Wales and Northern Ireland.
The Chancellor ended his Budget by saying that now is a moment of “challenge and change” for the country. The test for the Government is how well these policies meet that challenge and whether further changes will be needed later in the year.
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