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A pattern of dots. Read our guide to corporates on the 2021 budget and the economy levelling up.

Budget 2021 – Guide for Corporates

The Chancellor Rishi Sunak struck a positive tone in his Budget Statement, selling an upbeat vision for an economy “fit for the age of optimism”.

Richi Sunak will deliver his Spring Statement (formally known as the Spring budget) on Wednesday 23 March 2022. You can see our analysis in our Spring Statement 2022 – A guide for Corporates on Thursday 24 March.

Buoyed by better-than-expected Office for Budget Responsibility (OBR) forecasts, the Government has sought to demonstrate its commitment to investment in public services, a focus on growth and building resilience so that when the “next crisis comes” the Government will have the fiscal space to act. Whilst the Chancellor acknowledged that the COVID pandemic is not over yet – and his Budget contained measures to continue supporting those businesses hardest hit – the measures announced also seek to move the UK towards a new economy post-COVID: an economy of higher wages, higher skills and rising productivity.

Economic forecasts

The OBR has lifted its prediction for economic growth in 2021 to 6.5%, up from its previous forecast of 4%. It has also reduced its estimate of the long-term “scarring” effect of COVID-19 on the economy from 3% to 2%, with unemployment also now peaking much lower than initial OBR estimates at 5.2%.

Both these revisions allowed the Chancellor to describe the economic picture as “strong” in the short term and have allowed him to be more generous than may have been expected, with commitments made to the NHS, the “levelling up” agenda, and continued support for businesses hardest hit by the pandemic.

OBR and Barclays GDP forecasts

  2021 2022 2023 2024
OBR forecast from Feb 2021 4.0%
7.3%
1.7%
1.6%
Latest OBR forecast from Oct 2021 6.5% 6.0% 2.1% 1.3%
Barclays forecast from 22 October 2021 7.0% 4.2%
1.3%
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However, the Budget has been delivered against a backdrop of the worsening cost of living crisis, with labour shortages, a supply crisis, rising energy bills and looming inflation all making headlines recently. The OBR expects the CPI measure of inflation to average 4% over the next year, up from 3.1% in September.

The Government’s ambition for a new high wage economy will therefore also be judged against its plan to alleviate inflation. Acknowledging these challenges, the Chancellor said that the inflation rise is explained by global forces - including pressures on supply chains due to the pandemic and a surge in the global demand for energy at a time when supply was already disrupted – and therefore cannot be fixed “overnight”. However, he emphasised that the Government will act where it can, citing support for the HGV sector.

The Chancellor also set out new fiscal rules – titled The Charter for Budget Responsibility – which aim to keep the Government on the path of “discipline and responsibility” as they seek to balance the books for day-to-day spending by 2024-25. These are:

1

Underlying public debt as a percentage of gross domestic product must fall

2

Day-to-day spending will be funded from taxation and not from borrowing

How does the OBR produce its forecasts?

The Office for Budget Responsibility (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 Autumn Budget and Spring Statement.

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.

Business and industry

For business, this was a positive Budget Statement. Businesses were positioned as one of five pillars to deliver a stronger economy by “supporting businesses with post-Brexit tax reforms, tax cuts and incentives to invest”.

In a move aimed to help bolster London’s competitiveness as a global financial centre post-Brexit, the Chancellor has announced a cut to the bank surcharge that was introduced in 2015 by George Osborne. The bank surcharge, levied on banks’ profits, is being lowered from 8% to 3% from April 2023. Set against the backdrop of the rise in corporation tax to 25%, banks will now pay a total of 28% tax. The next big signal on the Government’s ambition for post-Brexit competitiveness will come when it publishes its next iteration of the Future Regulatory Framework Review.

The Government has published its long-awaited business rates review, announcing a series of reforms to the business rates system that seek to take on board widespread criticism of the current system. More frequent revaluations will now take place every three years from 2023, and a new investment relief aims to encourage businesses to adopt green technologies, while a new business rates improvement relief will allow businesses to make property improvements without paying any extra business rates for 12 months.

The Chancellor also acknowledged that the businesses hardest hit by COVID are still feeling the effects of the pandemic. As such, he announced a significant 50% reduction in business rates for companies in the retail, hospitality and leisure sectors, lasting for one year and doubled the tax relief for theatres, museums and galleries until 2023. Alcohol duty is also being reformed, including a cut to the duty rate to 6% from 15%, and a new progressive taxation of all products in proportion to their alcohol content introduced.

The Chancellor has also extended the Recovery Loan Scheme until 30 June 2022 to give lenders the confidence to continue lending to small and medium sized businesses. Finance will be available up to a maximum of £2 million per business, in an effort to support SMEs in recovering from the pandemic and to grow, whilst the Government guarantee will be reduced from 80% to 70% to encourage the lending market to move towards normality as the economy continues to recover.

Skills and innovation

As announced at the Conservative Party Conference, the Government is increasingly pushing for a high skilled, high wage economy. It views investment in people and skills as a core part of the levelling up agenda, and so to support this ambition, a raft of measures to help up-skill workers were announced. These included £68 million to level up the adult skills system, £560 million to establish the Multiply numeracy programme to improve people’s basic maths skills, and a £2.7 billion increase in apprenticeship funding by 2024-25. The Government will also be extending the £3,000 apprenticeship hiring incentive for employers – first introduced in August 2020 - until 31 January 2022.

Given the Government’s ambition to ‘unleash innovation’ in the UK economy, believing this central to driving long-term growth, the Chancellor reiterated the Government’s plans for a Scale-Up Visa system which aims to make it quicker and easier for fast-growing businesses to bring in highly-skilled individuals.

This may go some way to offset any disappointment in the Chancellor’s concession that the Government’s original target of increasing investment into UK research and development to £22 billion by May 2024 will now be delayed by two years. Instead, spending on research is now expected to reach £20 billion a year by the end of this term. Reforms to R&D tax credits have also been announced, with a re-focus on domestic innovation and expansion to include cloud computing and data costs.

Lastly, the Government has accepted the recommendation of the Low Pay Commission to increase the National Living Wage from £8.91 to £9.50 an hour. The rise means a full-time worker will get £1,074 extra a year before tax and will provide a welcome boost for workers but will impact smaller companies. Alongside this, the public sector pay freeze will also be lifted, and the Universal Credit Taper will be cut from 63p to 55p.

Minimum Wage increases from 1 April 2022

  • National Living Wage for over-23s: From £8.91 to £9.50 an hour
  • National Minimum Wage for those aged 21-22: From £8.36 to £9.18
  • National Minimum Wage for 18 to 20-year-olds: From £6.56 to £6.83
  • National Minimum Wage for under-18s: From £4.62 to £4.81
  • The Apprentice Rate: From £4.30 to £4.81.

Levelling up

The Chancellor described the levelling up agenda as the “golden thread” running through his Budget Statement. The Government wants to use these policies as a means to “extend the awesome power of opportunity to all corners of the United Kingdom” with extra funding, through the Barnett formula, going to Scotland, Wales and Northern Ireland.

The Budget confirms the new £1.4 billion Global Britain Investment Fund, which aims to help spread economic opportunities more evenly across the UK by supporting investment in the UK’s life sciences, offshore wind and automotive manufacturing sectors.

The Government has also pledged over £1.6 billion for the British Business Bank’s regional funds, which provide debt and equity finance to SMEs. This will expand these funds into the North East and South West of England, and will also provide for the Bank to set up new regional funds in Scotland and Wales, and to build on existing programmes in Northern Ireland.

Another core part of the Government’s levelling up agenda is to better connect communities through improving transport links. Many of the announcements of this nature were announced ahead of the Budget but include an investment package of £5.7 billion for eight English city regions to transform local transport networks.

More details on the Government’s levelling up agenda, including plans to continue increasing Government spending on research, development and innovation outside London, will be set out in a forthcoming Levelling Up White Paper.

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