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Look ahead to Budget 2021: More spend than tax?

Tom Rathborn Tom Rathborn

As the Chancellor prepares to present his annual Budget, Tom Rathborn explores what businesses want to see prioritised and what to look out for on the day.

Ahead of the 2021 Chancellor’s Budget, the Prime Minister announced his ‘Roadmap to cautiously ease lockdown’ - a four-stage plan, requiring certain tests to be met before each unlocking.

This should see the economy fully re-opened as early as 21 June. As this is well beyond the current end date for most existing business support measures, all eyes are on the Budget next week to find out what will be extended, ended or introduced to compensate.

Following a tough 2020, with UK GDP shrinking nearly 10%, and ongoing Brexit disruption, the Chancellor must strike a fine balance between tax (beginning the difficult process of balancing the books) and spend (extending business support measures).

Government sources suggest Rishi Sunak's Budget will focus almost exclusively on the latter, with the main goal being to protect jobs. Expectations for a major fiscal shake-up, with significant tax announcements, will have to be revised.

While tax rises will no doubt come in the long term, now is not thought to be the time for major change. The road to recovery will be long and next week’s Budget should be seen as the first tentative steps.

Mid-size companies prioritise growth over support

Ahead of the Budget, we surveyed over 600 senior decision-makers in UK mid-market businesses to find out what they wanted to see, finding that many want the Chancellor to focus on supporting business growth (45%) over COVID-19 support (27%) or recovery measures (23%).

The priorities for business growth measures were greater investment in:

  • infrastructure
  • incentives for skills training
  • areas outside of the capital, as part of the levelling-up agenda.

Unsurprisingly, there were striking sectoral differences. Areas most affected by lockdowns (eg, catering and leisure) are hoping for further support, while those able to work remotely (eg, professional services) are more concerned with growth drivers.  

Though business leaders are primarily focused on growth, it’s clear that the mid-market has benefitted from government support measures throughout lockdown, and that this support is still needed by many. Schemes that the mid-market would most like to see extended are:

  • COVID-19 Corporate Financing Facility (33%)
  • Coronavirus Business Interruption Loans (33%)
  • Business Rates Holiday (32%)
  • Coronavirus Job Retention Scheme (29%)

Five things to look out for on Budget day

1 Extending, refining, tapering and ending COVID-19 support 

The main challenge for the Chancellor will be in how he intends to extend and then end the various support measures in place. The timing and method will be key.

Previous hesitation around extending the Coronavirus Job Retention Scheme saw redundancies rise sharply. Balancing the varied impact of restrictions on different sectors and regions with the need to help transition organisations from support to self-sufficiency will be tough.

Businesses will be particularly keen to understand how Business Interruption loans will be treated, whether new capital will be provided and if business-rate holidays will be extended beyond current deadlines.  

There are a number of significant cliff edges in support offerings scheduled for the end of next month, and in April. Will that still be the case after the Budget is released?

2 Tax rises...but not as many as we might have expected

Given the amount of government spending, it's hardly surprising that tax rises were widely expected. However, the fragile state of the UK economy means it feels too early for significant policy shifts. Though we can't rule out some movement.

The Conservative manifesto pledged not to increase VAT, income tax or NICs, though it is hard to raise significant sums outside of these taxes. With that in mind, will these pledges hold, and where else might we see some initial changes aimed at bolstering treasury coffers?

According to our colleagues in our tax practice, there are several key areas where tax reform is a possibility, including:

  • raising the corporate tax rate from its current rate of 19%
  • new and expanded online or environmental taxes
  • capital gains tax, including possible rate rises and removing reliefs
  • inheritance tax
  • one off 'windfall' or 'wealth' tax 

3 Signs that the autumn statement might grow in importance

Governments tend to announce the largest tax increases immediately after a general election, in the hope that voters forget or they can reduce them on the eve of an election. Coronavirus has delayed any such ambition from the Chancellor and looks set to do so again.

It will become more politically challenging to significantly increase tax take the nearer we get to the next election in 2024. It's worth keeping an eye out for any clues as to where future rises might be focused and when they might come into force.

It feels like the autumn statement might prove to be the more-significant fiscal event in 2021.     

4 Further details on local government funding

The level of uncertainty in the local government sector is significant, providing challenges for medium-term financial planning. So councils will be keeping a close eye on details surrounding the timing of the next spending review and the financial  period it will cover, along with any update on the government’s plans to conclude the fair funding review.

5 A vision for post-Brexit Britain

With the Conservative party elected on a manifesto promise to “get Brexit done”, December’s Brexit deal saw the UK leave the EU to trade on the terms outlined in the new Comprehensive Trade Agreement.

The transition to this new arrangement has been bumpy so far and the Budget may contain additional measures to help businesses struggling with the change.

The main question is, with 3 years until the next election, what will the government prioritise next?

There should be a significant amount of political bandwidth now available to focus on new activity. Will this be thrown behind the levelling-up agenda or channelled elsewhere?

Whatever happens, we'll be following closely keeping you informed on the announcements that matter to you.

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