Chancellor of the Exchequer Rishi Sunak is expected to introduce cuts to UK public services of up £17 billion unless he takes action to increase funding in the coming weeks. The Institute for Fiscal Studies has said that, from April 2022, the UK government is on track to spend between £14 billion and £17 billion less each year across several different public services than had been proposed before the pandemic.
The IFS has warned that there are growing demands on public finances that need to be addressed head-on amid Sunak’s preparations to allocate funding for government departments as covid cases across the country continue to rise. Just last week, Sunak was forced to push back the formal launch of the Treasury’s spending review due to having to self-isolate. The spending review process will now be delayed until later this summer when MPs return to the House of Commons come September.
In a report that set out the economic backdrop for the chancellor’s spending review, the IFS said that Sunak was on track to be handed £30 billion by the Office for Budget Responsibility (OBR) for public finances this year as the UK experiences a much quicker recovery than initially expected. A budget deficit of £234 billion had been predicted by the Treasury watchdog this year, but the IFS, alongside US bank Citi economists, have said a shortfall closer to £203 billion is potentially more likely following the success of the vaccine roll-out.
However, the think tank has still warned that the improvement was unlikely to continue. Like many countries across the globe, the UK is expected to suffer lasting economic damage from the pandemic.
The move comes as part of a push by the UK government to step up its global competitiveness following Britain's exit from the EU. Rishi Sunak is anticipated to use his first speech at the annual Mansion House address to announce the details of a £15 billion programme of government bond issuance. All profits will be invested in environmentally sustainable projects.
Sunak will also announce the launch of a separate green savings bond for UK consumers in a bid to turn the country into a global leader for low-carbon financial services. The green savings bond will be used to support infrastructure schemes and create more green jobs within the UK.
The green savings bonds will provide consumers with the opportunity to support environmentally-friendly projects whilst receiving a fixed rate on their savings over a three-year term. The green bond issuances will help finance low-carbon schemes, such as offshore wind, low-emissions transport, and investments to boost biodiversity. They will be available through National Savings & Investments (NS&I), with a minimum investment of £100 and a maximum of £100,000 per individual. The green savings bonds will launch later in 2021.
Tax hikes
Chancellor Rishi Sunak has unveiled a major tax hike in the 2021 budget – with corporation tax on company profits rising by 6% to 25% in 2023. Darren Upson, VP Small Business Europe at Soldo has commented: “While the Chancellor understandably needs to raise revenue to pay off the eye-watering amounts of cash borrowed throughout the course of the pandemic, we nonetheless worry about the timing of these tax hikes. In the context of Brexit, the government needs to ensure the UK remains an attractive destination for business. The last thing it ought to be doing is risking putting off investors and entrepreneurs with what may be perceived as a punitive tax regime. Another crucial concern is that these tax hikes may discourage SMBs from hiring. With unemployment creeping up, this move could ultimately prove to be counterproductive.”
Melissa Christopher, Executive Director at ZEDRA, argues the opposite:
”While the corporation tax rate increase is disappointing, it was inevitable that tax rises would happen and it primarily affects groups of companies that are profitable. The revised loss rules will help those companies who have struggled during the pandemic and will take a couple of years to recover.
“We rarely welcome tax increases, but tax certainty is helpful for international businesses as they plan their own budgets and revise business arrangements in the recovery period. The fact that the increase is not until 2023 will allow sensible business planning. No group should be making decisions on headline tax rates alone, and now is perhaps the best time to make reasoned and educated assessments of long-term expectations.
“International companies looking to expand to Europe will look at the UK as a successful economic location, with a motivated and educated workforce, and a stable business environment; the latter is particularly crucial in these turbulent times.
The extension of the furlough scheme
“The Chancellor’s decision to extend furlough [until September] will be hugely welcome for firms who’ve continued to struggle through this latest lockdown, but this solves just one part of a much bigger problem.
“Many workers being kept on the scheme will now be feeling huge financial and mental strain resulting from prolonged job insecurity and reduced pay, meaning businesses taking advantage of the extension need to have robust support in place for this section of their workforce. Even if you already have a benefits and wellbeing strategy in place, it’s well worth reassessing people’s current needs and priorities, as it’s more than likely you’ll find certain resources could be better utilised moving forward.
“The Prime Minister’s roadmap out of lockdown put the return of ‘normality’ firmly on the horizon, so when we eventually make it through the other side it will be just as important to have measures in place to support employees through the lasting effects of the pandemic. Workers have been incredibly loyal during a tough year, so these decisions should not be taken lightly.”
-Steve Bee, Director of WorkLife by OpenMoney
The extension to the stamp duty holiday and introduction of a government-backed 5% mortgage
“The Chancellor’s decision to extend the Stamp Duty Land Tax (SDLT) holiday and provide a Government-backed guarantee to mortgages with deposits of just 5% reflect the importance of maintaining optimism in the UK housing market. This level of support shows that the government continues to view the housing market as key to the UK economy at a time when the latest Nationwide House Price report confirmed that demand from buyers is being sustained.”
-Tom Brown, Managing Director of Real Estate at Ingenious
Help to Grow
“We applaud the government’s new £520m Help to Grow scheme, which aims to help small and medium-sized businesses boost their productivity. It’s particularly exciting to see the digital element of this, with the offer of technology advice and discounted software. This is exactly the kind of creative thinking required to get businesses back on their feet.
“It’s good to see the government offering guidance and channelling resources towards a specific and sensible direction, rather than simply throwing money at businesses and hoping for the best. It’s clear that digitisation and cloud-based operational models are the way of the future, and businesses that don’t embrace this are going to have a difficult time competing in the post-COVID era. Finance decision-makers, in particular, ought to use this ‘great pause’ to reassess their business and payments strategy, ensuring that these are fully optimised for life beyond the lockdown.”
-Darren Upson, VP Small Business Europe at Soldo
The £100m investment in the HMRC taskforce
“This is a positive announcement by the Chancellor and more than 1,000 new investigators may go some way to recouping the £billions which have been lost to fraud over the past 12 months of the coronavirus crisis.
“There’s no doubt that extra resources are much in need, particularly as the Chancellor has also announced a new Restart fund for businesses to replace the Bounce Back loans, which was wide open to fraud.
“But it’s also vital that a significant amount of that £100m investment goes into the systems used by HMRC to find those responsible for fraud. Without the use of the latest digital platforms to run ID checks and verify information on a global scale, these investigators will be in danger of just becoming busy fools.”
-John Dobson, CEO at AML specialists SmartSearch
The wider implications for the FinTech industry
“In the face of adversity, the UK FinTech industry has proven its resilience, attracting $4.6bn in VC investment last year despite the challenges and uncertainty caused by the pandemic. But safeguarding this growth and establishing the UK as a world leader in FinTech will require us to cultivate an attractive and prosperous environment for talent from all walks of life.
The Chancellor’s ‘fast-track’ FinTech visa is a welcome step in the right direction and there’s no doubt that the Kalifa Review signals a commitment to long-term investment. However, true innovation comes through diversity of thought and background, and as a migrant myself, the budget was missing this final piece: a reassurance to foreign talent that there is a home for them in the UK FinTech community.”
-Daumantas Dvilinskas, CEO and Co-Founder, TransferGo
Contactless payment limit
“The single contactless limit for credit and debit cards will rise to £100, and cumulative contactless payments up to £300 (before the need for consumers to input their chip and pin). This change may cause a divide among consumers, some may celebrate the change whereas others could now be concerned about over-spending or fraud. It is wise for customers to keep a close eye on where their money goes and be aware of when they will be required to use their pin. Peace of mind is a definite benefit when using a credit card for shopping, either in-store or online, as consumers are protected under Section 75 of the Consumer Credit Act for payments of £100 or more. If shoppers struggle to pay back their balance, they would be wise to hunt down a decent interest-free credit card for extra breathing space to tackle the debt.”
-Rachel Springall, Finance Expert at Moneyfacts.co.uk
What was missing?
“In a number of ways, the budget did not have the sharp teeth so many feared. There was no mention of a wealth tax, no wholesale reform to the inheritance tax regime, no sign of the increases in Capital Gains tax that were thought inevitable and an extension to the SDLT holiday. That is not to say that the door has now closed on these changes; in fact, we think it remains wide open and that the Chancellor will turn his attention to some of them in due course.
“It is also interesting to see the government’s forecast for inheritance tax receipts for the coming year has, for the first time, reached £6 billion. With this news and the OTS’ most recent report on the subject in hand, it remains an area we believe that is due for significant reform in the coming couple of years.”
- Tim Snaith, Partner at Winckworth Sherwood
The UK economy shrank by a record 9.9% last year but narrowly avoided a much-feared double-dip recession. The shrinking economy is thought to be largely due to coronavirus restrictions according to figures from the Office for National Statistics (ONS).
The latest report shows that the UK’s economic contraction was more than twice as much as the previous largest annual fall on record.
There was some good news even though the overall annual report looked bleak as the economy recovered to grow by 1.2% in December, after shrinking by 2.3% in November.
This is thought to be due to the relaxation of lockdowns during the run-up to Christmas, but many industries which had started to recover lost ground were hit again and suffered further losses such as automotive, hospitality, the beauty sector such as hairdressers.
The slight growth in December confirmed economists’ hope, that the UK economy looks set to avoid what could have been its first double-dip recession in over 40 years. However, with the lockdown currently in full force, there is some trepidation as to what the figures for January and February bring.
What is a Double-Dip Recession?
A recession is defined as a period of two consecutive months where a country’s economy shrinks. A double-dip recession is when the economy recovers for a short period of time into growth only to fall back into shrinkage once more.
Speaking about the news, Chancellor Rishi Sunak said: "Today's figures show that the economy has experienced a serious shock as a result of the pandemic, which has been felt by countries around the world.
"While there are some positive signs of the economy's resilience over the winter, we know that the current lockdown continues to have a significant impact on many people and businesses.
"That's why my focus remains fixed on doing everything we can to protect jobs, businesses and livelihoods."
Britain has suffered a torrid time during the coronavirus pandemic, as it reported Europe's highest death toll and also sits near the top of the world's highest death tolls per capita. This has led to long periods of lockdowns and continuous restrictions, which it seems have had a record-breaking negative impact on what was a thriving economy a year ago.
The blow suffered by the large service sector, on which the UK is very dependant, much of which has been closed for the best part of the last year has been cited by many as one of the largest contributing factors to the damage suffered by the UK economy.
However, there is hope with Britain boasting the highest vaccination rate of most European countries so far, raising the prospect of a faster overall rebound for its economy, although experts are cautioning that this may not occur until later this year.
In a presentation following the Chancellors statement yesterday, the IFS have claimed that the job of mitigating the debt caused by the governments current spending plans could be a job “for not just the current Chancellor, but also many of his successors”.
At a presentation of its findings on the Chancellor’s statement, IFS director Paul Johnson said that a “reckoning, in the form of higher taxes” would have to come eventually. It also suggested that the economy will not grow as large as it could have done if the Covid-19 crisis had not hit.
“If that’s the case, and it’s very likely to be the case, revenues will still be depressed, and if we want to try then to bring the deficit back to where it would have been absent the crisis, we will need to do some spending cuts, or given a decade of austerity, perhaps more likely some tax rises,” he said.
“It’s going to take decades before we manage that debt down to the levels we were used to pre this crisis.”
The IFS has also cast some doubt on the potential effectiveness of the Stamp Duty scheme and the 50% off dining initiative warning that the temporary stamp duty holiday, announced by Mr Sunak, may in fact increase house prices while deputy director Helen Miller raised doubts as to whether the meal discount scheme and VAT cut were driven by a problem with demand, or supply – with businesses unable to accommodate customers due to social distancing constraints.
Her concern lay in the fact that many businesses may not pass on the VAT savings to customers, thus negating the purpose suggesting that “the firms that benefit most would be those who have the highest sales, who are operating closest to normal”.
This isn’t the first time Rishi Sunak’s plans have been called into question. HM Revenue and Customs chief executive Jim Harra has also raised concerns about the Job Retention Bonus scheme which gives £1,000 to firms for each furloughed employee they bring back to work and whether it actually offers enough value and benefit.
In a letter to the Chancellor, he requested a ministerial direction which is a formal order to go ahead with a scheme despite the concerns.
Mr Harra said that while there was a “sound policy rationale” for the Job Retention Schems, but that “the advice that we have both received highlights uncertainty around the value for money of this proposal”.
Mr Sunak himself said he expected a “dead weight” cost to the JRS scheme, as many companies who already plan to retain staff will reap the benefit.
Speaking to BBC Radio 4’s Today programme he stated his feelings that “without question” there has been “dead weight in all of the interventions we have put in place”. However, many economists and even the leader of the opposition, Labour leader Sir Keir Starmer voiced concerns that Government could not in fact afford the “dead weight”, stated his belief that the scheme should have been a targeted initiative and not a one size fits all payout.
However, the government have since responded through a Treasury spokesman who stated that the Government is confident the Job Retention Bonus scheme is the “right policy” to help protect jobs.
