Will UK Budget deliver for UK businesses?

Faced with high inflation and borrowing costs, a possible recession and myriad other headaches, will Chancellor Jeremy Hunt bring some relief in the 2023 Budget?

The UK's Chancellor of the Exchequer Jeremy Hunt will deliver his Budget to the House of Commons on Wednesday. PA

Political lobbying always increases in the lead up to the UK's annual budget, but this year it seems particularly intense.

As far as British businesses are concerned, they will be looking for the Chancellor Jeremy Hunt to provide some sort of relief in what's been a tough time for companies.

Rising inflation, soaring energy costs, supply chain issues and a tight labour market are just a few of the challenges faced by British businesses over the past year.

The Confederation of British Industry (CBI) believes "there is a path to growth if we prioritise innovation and tackle the great challenges of the economy at the forthcoming Budget".

Businesses will be watching closely at several issues that are due to be addressed when Chancellor Jeremy Hunt unveils his budget on Wednesday.

Firstly, there is the issue of corporation tax, which for those companies making over £250,000 a year in profit will rise by 6 per cent to 25 per cent from April.

At the same time, the current super-deduction scheme, whereby entities have been able to gain tax relief by reinvesting in their operations, is due to fall away at the beginning of next month.

The super-deduction allows companies to cut their tax bill by up to 25p for every £1 they invest back into their businesses.

The combination of raising the tax rate and dropping the super deduction has been described as a double whammy by business leaders and some Conservative MPs.

“There is currently little incentive for firms to risk ploughing their dwindling cash reserves or fresh loans into new projects,” said Alex Veitch, director of policy at the British Chambers of Commerce (BCC).

Nonetheless, while Mr Hunt is unlikely to heed calls to scrap the rise in corporation tax, it's widely expected he'll replace the super-deduction scheme with a comparable plan.

Traders at Peel Hunt watch as UK Chancellor Of The Exchequer Jeremy Hunt presents his Autumn Statement, in November. Bloomberg

"Back in the game on global investment”

The CBI favours a "full expensing" scheme, that would allow for 100 per cent of reinvested money to be offset against tax.

This would be less generous than the current super-deduction, which allows for 130 per cent capital allowance on qualifying plant and machinery investments and, says the CBI, could be phased in over three years, starting at 50 per cent in the first year.

“A six-point rise in corporation tax as the super-deduction ends will have a huge impact on investment which is desperately needed to grow the economy and improve productivity," said Louise Hellem, director of economic policy at the CBI.

"Our proposals on full expensing would see the UK back in the game on global investment.”

Mr Hunt has spent some time consulting on a range of options for replacing the super-deductions, but recently told business groups that any successor scheme would be far less generous. The current super deductions have cost the Treasury around £25 billion over the past two years.

"We still believe that increasing corporation tax is a big mistake,” said Robert Colvile at the Centre for Policy Studies think tank.

Introducing full expensing “would at least compensate for its effects and persuade businesses to help deliver the growth we so desperately need,” he added.

Letting both the rise in corporation tax to 25 per cent and the demise of the super-deduction happen with no, at least adequate, remedial action would be a big surprise to business, but some are not convinced that neither will have a large effect on foreign direct investment (FDI).

"It is not clear that the super deduction has provided much of a boost to investment, because its effects have been swamped by the uncertainty caused by Brexit, Covid and the war in the Ukraine," Peter Spencer, emeritus professor at the University of York told The National.

"I’m not sure that the increase in the mainstream rate to 25 per cent will have much of a negative effect. That is because [former Chancellor] George Osborne's reduction from 25 per cent to 19 per cent did not obviously boost investment or FDI."

British businesses are battling soaring energy costs. PA

Energy boost

Another major area that businesses will be closely watching in Mr Hunt's budget speech is energy.

As for households, there has been an Energy Bill Relief Scheme (EBRS) for businesses running through the winter, but that comes to an end this month.

It will be replaced by the Energy Bills Discount Scheme (EBDS), which will offer businesses a discount on their gas and electricity unit rates, as measured in kilowatt-hours (kWh).

The EBDS will be considerably less generous than the EBRS, illustrated by the simple fact that total funding for the EBRS was estimated to be around £18 billion over the six months from October 2022 to the end of March this year, while the funding for the EBDS for the 12 months from April this year to the end of March next year will be capped at £5.5 billion.

A recent report from the internet company, GoDaddy, found more than three-quarters of entrepreneurs see the cost-of-living crisis is the greatest challenge they have faced, with most highlighting the impact of higher energy bills.

Nearly half felt that the Chancellor should offer tax incentives and some small business like bakers feel they should be included in the EBDS energy-intensive industries and therefore be eligible for larger discounts.

Chris and Sarah Fryer, who run a vegan pie business called Magpye in Newcastle, said: "As a bakery we use a lot of energy, so the rising cost of gas and electricity has dramatically increased our overheads.

"We are concerned about the energy relief scheme coming to an end in April, and would like to see the government launch targeted help for energy-intensive businesses like ours," they added.

Of the 2.3 million small and micro businesses surveyed by GoDaddy, 630,000 said they were at risk of bankruptcy this year, because of rising costs.

Nurses, teachers, civil servants, rail workers and others continue to strike over pay rises that do not match the rate of inflation. AFP

Labour market

It's possible that the Chancellor may use the Budget as an opportunity to address some issues that are stubbornly lingering in the UK's labour market.

Industrial action has been rampant in Britain over the past several months, as nurses, teachers, civil servants, rail workers and others continue to strike over pay rises that do not match the rate of inflation.

Public sector real pay, which takes inflation into account, has fallen faster than private sector pay in the wake of the pandemic.

The government has said that a 3.5 per cent pay rise for public sector workers is all that is affordable at the moment, but that is less than half the current 10.1 per cent rate of inflation.

Experts, however, feel that it is unlikely that Mr Hunt will make any blanket announcement on pay rises for public sector workers, as he prefers to leave that to the pay review bodies. Indirectly though, he could allow government departments more flexibility when it comes to pay awards for civil servants.

Tempting back older workers

Another area of the labour market which Mr Hunt could address in his Budget might be that of tempting older workers back into the economy.

Since the Covid pandemic, the number of economically inactive 50-64 years olds has jumped by 300,000. The trend weighs on the UK’s growth potential and reduces tax revenues.

Mr Hunt could incentivise this group to return to the workforce through subsidised training.

Another proposal would be to reduce the burden of childcare costs on younger workers, because it's estimated that 40 per cent of grandparents over 50 provide some sort of childcare to their grandchildren.

Government ministers have said that they are considering tax breaks to bring older people back into work, including potentially exempting over 50s from income tax for up to a year.

The Chancellor could also scrap or raise the lifetime allowance limit of just over £1 million on how much people can save into pension programmes without incurring a levy. He could also raise the £40,000 annual pension contributions cap as well.

That would work well for over 50s still in work, but for those already drawing on their pensions, it's more complicated.

"If they’ve accessed their pension, they may face restrictions on how much they can contribute to rebuild it and this needs to be looked at," said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.

"The Money Purchase Annual Allowance (MPAA) restricts those who have already accessed their pension to contributions of just £4,000 per year. This is way lower than the £40,000 annual allowance and if you break it, you get clobbered with a tax bill."

The MPAA needs to be removed as part of a wider review of pension tax relief. This means people who have taken a career break and return to work have a better chance of rebuilding their pensions."

Not much on personal tax

Except for possibly tweaking some pension allowances, the expected freeze on fuel duty for the next year and a three-month extension of the scheme that helps households with their energy bills, it looks like there will be nothing substantial in Wednesday's Budget for individuals.

But the Chancellor does have some wriggle room with this Budget, thanks in part to a slightly improved economic picture, lower public sector borrowing and falling wholesale energy prices.

However, even though the Chancellor has limited wiggle room, that does not mean he's going to dance. And certainly not to the voices that are demanding massive tax cuts.

Mr Hunt's current restraint is seen by many to have a politically strategic element.

By spending less now, he'll have more of a war chest to make impressive tax giveaways next year, much closer to the UK's next general election.

"The reason he's waiting until next year isn't really the fiscal rules, is it? It's the election timetable," said Torsten Bell, the chief executive of the Resolution Foundation last week.

Meanwhile, analysts at BNP Paribas also contended that holding the best tax cuts over until next year will be a priority for Mr Hunt, which would mean that the estimated wriggle room of £30 billion, in reality, is only about half that.

Others though are not so convinced he has time on his side, given that if the economy is going to be in reasonable shape going into a general election next year, the help to put it on a path to rapid recovery needs to happen straight away.

"The Chancellor would normally reserve any giveaways for a pre-election budget next year," Professor Spencer at the University of York told The National.

"However, the Tories have staked their reputation on a resumption of growth and any giveaways this time next year would simply not have time to boost this."

"Any measures to stimulate investment and growth need to be put in place immediately."