Nimesh Shah, CEO
It was a naturally subdued Spending Review statement from the Chancellor, Rishi Sunak, which highlighted a set of worrying figures on the state of the UK’s finances:
- UK GDP will fall 11.3% this year, which is the largest fall in 300 years.
- Unemployment is to hit 7.5% next year with 2.6m out of work; unemployment will come down to 4.4% by the end of 2024.
- Economic growth is returning but it won’t be back to pre-crisis levels until the fourth quarter of 2022. Even then, the economy will be 3% smaller in 2025 than expected at the March Budget.
- The Government has borrowed £394bn in 2020, of which £280bn has been used for the fight against COVID-19 (with a further £55bn expected to be spent in 2021).
As widely leaked before today’s statement, public sector pay will be frozen, other than for lower paid workers and medical staff in the NHS.
The National Living Wage will increase to £8.91 per hour for those aged 23 and over, which represents an average pay increase of £345 per annum. At a time when businesses are severely struggling with managing costs, some will be concerned that an enforced pay increase is imminent.
Thankfully, there was no mention of changes to taxes. Businesses will breathe a huge sigh of relief that there was not even a suggestion from the Chancellor that tax increases are imminent after recent heightened speculation, but it’s inevitable increases will happen at some point next year.
Overall, the Spending Review did exactly what it set out to do. It was never meant to be a Budget (although at points it started to feel like it would be), but it paints a dark picture of the UK’s finances as the Chancellor faces tougher and far more unpopular decisions in 2021.
Heather Powell, Head of Property & Construction
The announcement of £7.1bn funding for a National Home Building fund is good news for regional house builders.
Access to development finance at affordable rates is essential to ensure that the new homes this country needs are delivered. The funding will also ensure jobs are retained in the industry. It is to be hoped that it will also give private developers the confidence to invest in training apprentices and the modern methods of construction that need to be embraced to build energy efficient homes.
Research & Development
David Hough, Business Advisory Partner
The Chancellor announced £15bn funding for research and development (R&D) although the intended strategy for the spending of the allocation was not clear. In order to address the challenge of the Green Recovery Plan and the impact of technological change on blue collar industries, significant investment will be required.
Large-scale investment in R&D was a welcome pronouncement made by the Chancellor. The Prime Minister’s recent ten-point plan on tackling climate change was ambitious in sentiment and there is an opportunity for the UK economy if technologies to address this are developed within the four nations.
At the same time, UK sectors are increasingly looking to technology to access new revenue streams and make cost savings. However, it is crucial that the strategy for using the available funding is made clear and contracts are awarded on a transparent basis to ensure that public money is used effectively.
Economic impact and tax
David Hough, Business Advisory Partner
The Chancellor provided details on the economic impact of Coronavirus. Amongst a range of eye-watering figures provided, he announced that the Office for Budget Responsibility forecasts the UK economy to be 3% smaller in 2025 than was forecast in the March budget. Further spending announcements were made on public services and to date this has resulted in a significant increase in borrowing (£394b in the current year alone).
That the economic impact of the pandemic has been disastrous was not a surprise and, in some respects, we have become de-sensitised to the scale of the financial support measures that have been introduced. Ultimately, this will need to be paid for and there was little in the Spending Review on how this will be achieved.
Pauses to public sector pay and reductions in overseas aid will only make a partial impact on the significant deficits that have arisen. In the short-term, it appears that the Chancellor is banking on infrastructure investment to return the UK to economic growth so that when tax rises come, they will fall on a more resilient economy.
National Minimum Wage – a lost Budget opportunity
Richard Churchill, Partner
Increasing the National Minimum Wage should be supported but this is an additional cost for many businesses in the hardest hit sectors of retail and hospitality. The Chancellor needs to acknowledge that this is contradictory to job preservation and creation and must ensure support is given to these businesses to make sure there is simply not just less jobs.
It is Important that record levels of spending on infrastructure provides work for as many businesses as possible and further measures should be introduced to ensure smaller and local businesses have opportunities to win some of the work.
The Chancellor wishes us to be a scientific superpower, but without an Autumn Budget he lost the opportunity to amend fiscal policy to encourage entrepreneurship and R&D.
It would have been helpful for the Chancellor to outline his plans to protect and then grow the tax base of the country before he undoubtedly has to take a bigger slice to fill the huge gap in finances caused by COVID-19.
How are we going to pay for it?
Genevieve Morris, Head of Corporate Tax
How are we going to pay for it all? It is clear that taxes will have to rise in order to pay not just for what has been spent already, but what is due to be spent in 2021/22. On the plus side, the Chancellor does realise that cutting spending on critical capital-intensive projects at this time is not the right approach to help the economy.
However, everyone – businesses and individuals – should expect to be part of the solution to the economic crises with increased taxes spanning a decade or more. I would hope that any tax rises will come with suitable protection for the lowest paid, such as an increase in the personal allowance to ensure their take home pay is not impacted.
Would you like to know more?
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