James Sproule is Chief Economist and Director of Policy at the Institute of Directors.
Businesses have had good reason to be disappointed with George Osborne since last year’s general election. He was supposed to have been ‘unshackled’ from the Liberal Democrats, free to rip up regulation, trim taxes and cut spending to fix the deficit. Instead, the past ten months have been decidedly challenging.
A steep hike in the minimum wage – the new National Living Wage – is set to cost firms the best part of £1 billion. The biggest employers are also facing a new payroll tax, in the form of the Apprenticeship Levy, which will become a £3 billion a year revenue raiser. At the same time, the government’s mandatory volunteering scheme is still on the cards, and the very smallest firms are grappling with the latest extension of the pensions auto-enrolment scheme.
It was good, therefore to see this Budget contained few surprises for businesses (sugar tax aside). Those which were announced by the Chancellor yesterday were, on the whole, pretty good news – especially for smaller firms and entrepreneurs.
First, the nitty-gritty of tax. The big takeaway for business will be the announcement of a further chipping away of the corporation tax rate – which will now hit 17 per cent by 2020. Corporation Tax is a key consideration used by companies around the world when they choose where to base themselves. Having a lower rate than our international competitors is a big draw in terms of foreign investment and the jobs that brings with it.
Perhaps more encouragingly on the corporation tax front was the Chancellor’s hint that a much bolder change could be on the cards. “All the evidence shows it’s one of the most distortive and unproductive taxes there is.” The IoD agrees. As the furore over any number of recent high-profile scandals shows, it is inflammatory, unfair and incredibly complicated. Far better to remove taxes on business profits and move to something which creates less public outcry and actually represents a company’s presence in a particular country, rather than just how many brass plaques or fancy accountants it can buy.
Personal tax changes announced by the Chancellor will also be welcomed by smaller firms and entrepreneurs, with significant progress announced on both raising the personal allowance towards £12,500 and the higher rate tax threshold to £50,000. Few would bet against the Chancellor now being able to deliver both by the time of the 2020 election.
Higher tax thresholds make good fiscal sense. If we can afford to index state pension payments, we can afford to index the thresholds of tax. These thresholds matter not only to employees but businesses and business leaders. Lower tax rates, or higher tax thresholds, incentivise both public and private sector workers to take on more hours, accept promotions and move to more rewarding jobs. This is good for the economy as a whole, as it utilises our full productivity capabilities and helps firms retain staff.
There were other entrepreneur-friendly measures in the Budget as well as the Chancellor made clear he wants those who take the risk of launching their own business to keep more of any rewards. Capital Gains Tax has been cut significantly and Entrepreneurs’ Relief will be extended to long-term investors in unlisted trading companies. This is a decent recognition of the entrepreneurial revolution sweeping Britain and the need to encourage owners, founders and investors to focus on scaling up those businesses.
On new spending measures, Osborne also announced some big-ticket infrastructure projects, particularly for the Northern Powerhouse which will be cheered by businesses. The trans-Pennine tunnel could deliver a big bang for its buck, and HS3 is absolutely critical to connecting the great cities of the north. Further south, London could arguably not have enough new transport links, so giving the green light to Crossrail 2 before the first one has even been completed is good planning.
As is the Chancellor’s wont, however, he did not confine himself just with the day-to-day business of tax-and-spend. In a Budget he said was focused on the next generation, there were some welcome changes to Britain’s education system (and yes, it was curious that it was contained within the Budget). The extension of compulsory maths classes until the age of eighteen may not win Osborne his own teenage following, but will pay dividends in future years.
Maths is the language of business and logic – being able to read and write in numbers is the key to career success, yet one-quarter of all adults have the numeracy skills of a ten-year old. For young girls, too few of whom take up the vital STEM subjects after the age of 16, this is an especially important development. The IoD hopes that some of the extra time spent with a calculator in hand will be devoted to business accounting – putting balance sheets on the curriculum and getting young people comfortable with the fundamentals of business.
Nevertheless, the Chancellor will be all too aware that he is yet to show his own workings on a Budget which was, by Osborne’s standards, less than explosive. The Conservatives’ mandate is predicated on cutting the deficit. To do so will require some hefty – and as yet, unexplained – spending cuts or tax rises in the run up to the next general election. As we’ve seen in just the last few months, forecasts change quickly. While the OBR has given its best estimate as to what they think might happen, they are ultimately advisors and it is Ministers who are responsible for acting on that advice. A benign economic scenario would be a welcome development, but to count on one would be imprudent.