The rumour mill is churning. Will George Osborne ease up on businesses in today’s Budget? Companies have shouldered a lot of responsibility for his plans so far. The chancellor justified giveaways in the last Autumn Statement with better-than-expected economic growth and, crucially, a series of levies on firms. A raft of new measures have been announced since the General Election, nudging businesses to cough up more contributions, including the national living wage, insurance premium tax and the Apprenticeship Levy.
But what next – now that the economic picture isn’t quite so rosy? Among the key changes we expect to see today are downgrades to growth forecasts, which may prompt the chancellor to raise his borrowing forecasts. This will be a delicate issue for George Osborne.
The ICAEW economic forecast, which includes a barometer of business confidence from the views of finance directors across the country, is being downgraded to 2 per cent GDP growth for 2016. Business investment growth is expected to fall. Companies are losing their motivation to invest – in response to growing uncertainty caused by turbulent global markets and the looming referendum over the UK’s membership of the EU.
All in all, Osborne would have hoped for a more robust economic background to today’s speech. Borrowing levels are still precariously high. Even with steady growth and a surplus by 2020, it will still take many years to get debt back to pre-crisis levels as a share of national income. This would make sorting out the nation’s finances a three-parliament challenge.
Businesses are being cautious with their cash, and keeping steady for now until they start to feel the benefits of an economic recovery. Recent research from ICAEW shows that more than half of firms, of all sizes, have low ambitions – meaning they are planning either for no or limited growth in turnover. More businesses are planning for a stall than for expansion. Almost a third have no plans to actively grow and 22 per cent are seeking only limited growth (measured as a 1 to 4 per cent increase in turnover per year). Only 14 per cent of businesses are aiming for rapid growth (measured as a 20 per cent increase per year) and 35 per cent are going for moderate growth (a 5 to 19 per cent increase per year).
This is not good news for productivity. When asked what would encourage businesses to grow, 21 per cent of respondents cited some form of government action – including a cut to VAT, reduced regulation and improved links with Local Enterprise Partnerships.
With businesses holding back on investment, Osborne should be concerned about meeting his target of rebalancing the economy, which is currently far too reliant on credit and consumption. The dependence on domestic and consumer sales will spell troubled times for the UK economy in 2016 if sudden and unexpected hazards appear in the road.
So how can Osborne help business to help him? The chancellor has promised to cut regulation to recognise the role that business has played in buoying up growth. But in the same breath, we see a raft of measures, like Making Tax Digital and proposals for quarterly tax returns, which add more administrative burdens to those businesses. If Osborne wants to protect the recovery, it’s time to reduce the red tape and give business the room to grow.
So what’s it going to be? We all know the chancellor wants to balance the budget, but can he balance the rhetoric?