Weathering the Economic Storm: What's Ahead for Businesses?
From controversial tax cuts and ministerial sackings to policy U-turns and calls for a general election, turmoil in Westminster - and the UK economy - is plaguing the pound.
On 23rd September, then Chancellor of the Exchequer Kwasi Kwarteng delivered a Ministerial Statement entitled "The Growth Plan'' to the House of Commons. Dubbed the “mini-budget” it turned out to be political suicide and he was sacked three weeks later.
The mini-budget 2022 included huge tax cuts for the wealthy, which were intended to tackle soaring energy costs and inflation and deliver higher productivity and wages. But it was unclear how they would be funded, triggering a major backlash from the public and many of his colleagues. This uncertainty sounded the death knell for Mr Kwarteng after prime minister Liz Truss - who had ratified the mini-budget - asked him to “stand aside”.
The government lurched into another crisis when his replacement in 11 Downing Street, Jeremy Hunt was forced to axe most of the mini-budget as Liz Truss battled to remain in the top job. Mr Hunt’s announcement that he was ripping up "almost all" of his predecessor's tax cuts was made in a bid to stabilise financial markets - but it wasn’t enough to save Liz Truss. With her reputation in tatters, she resigned after just 45 days in office, making her the shortest-serving prime minister in UK history. This paved the way for Rishi Sunak to become Britain's third prime minister in two months.
So, what drastic action has the new chancellor been forced to take and how is it impacting the pound and small and medium enterprises (SME) in the UK that have an international footprint? That’s assuming it won’t be rethought for a second time following Mr Sunak’s arrival at number 10.
By scrapping policies from the so-called mini-budget, Mr Hunt abandoned almost all the promised “pro-business” tax changes that aimed to help SMEs succeed amid soaring inflation.
Despite this U-turn, business groups welcomed the change of policy which they hope will restore the country’s credibility. Roger Barker, head of policy at the Institute of Directors - a professional body that had supported the reforms - said: “The chancellor needs to reestablish confidence in the market. All these things in isolation were welcome, but the priority has to be regaining the trust of the markets,” he added.
As of today, here are the main mini-budget measures that were scrapped - and retained - that will impact SMEs:
Energy bill support for small businesses
The mini-budget aimed to shield businesses from soaring energy prices by establishing an Energy Bill Relief Scheme that offered financial support from 1st October until 31st March 2023. In his emergency statement, Mr Hunt said the scheme will be replaced by a more targeted programme from April 2023 that will “cost the taxpayer significantly less than planned”.
The new chancellor said: “it would not be responsible to continue exposing public finances to unlimited volatility in international gas prices” and that “any support for businesses will be targeted to those most affected and the new approach will better incentivise energy efficiency.” Time will tell if it’s enough just to give businesses help with energy bills.
Corporation tax rise
Just hours after Kwasi Kwarteng was sacked, Mr Hunt confirmed that he would reverse the government’s flagship plan to keep corporation tax at 19% next year, rather than letting it increase to 25%. Therefore, the rate of corporation tax will now rise to 25% in April 2023 - increasing government revenue by around £18bn. Business groups responded to the announcement by urging the chancellor to implement targeted tax incentives to offset the restored rise in corporation tax next year.
However, SMEs will not have to pay the full rate, with the amount payable depending on their level of profits for each fiscal tax year. The current 19% rate will still apply for businesses with annual profits at, or below a new £50,000 threshold. The full 25% rate applies to companies with annual profits of £250,000 or more. Between these two rates, a system of marginal relief will apply.
National insurance tax hike
In April, national insurance contributions increased by 1.25% for both employees and employers. Mr Kwarteng confirmed plans to reverse the rise in his ill-fated financial statement - one of the few economic policies that his successor decided not to reverse. It will be scrapped on 6th November.
Scrapping the national insurance hike means around 920,000 businesses are set to save £9,600. For SMEs who experience reduced national insurance contributions, the average saving is £4,200 and £21,700 in 2023-24.
The Treasury Department said the plan to stick with the national insurance reversal will allow firms to invest the money they save as they choose: “As a result of this tax cut, businesses will have more money to invest in becoming more productive, pay higher wages, create more jobs and support the overall growth of the UK economy.”
The mini-budget dealt a knockout blow to the pound, which hit an all-time low against the dollar after Mr Kwarteng announced the government’s raft of short-lived tax cuts and spending measures.
The UK currency sank nearly 5% against the dollar to 1.0327 - its lowest since Britain went decimal in 1971 - as faith in the government’s fiscal policies evaporated. It was a similar - but less severe - story against the euro, as the pound plunged to a 19-month low.
The pound rebounded on 17th October after Mr Hunt overturned more of the giveaway measures in his emergency statement - jumping to 1.14 against the dollar and 1.16 against the euro. But its rally was derailed just three days later by the resignation of prime minister Liz Truss, triggering further economic and political uncertainty that weighed on the pound.
The pound hit a six-week high on 25th October as Rishi Sunak became prime minister, a sign of the markets welcoming the former chancellor, Goldman Sachs analyst and hedge fund partner. At the time of writing, The UK currency was up 1.92% against the dollar at 1.150 - the highest level since 15th September.
Jeremy Hunt - who was reappointed as chancellor by the new prime minister - has delayed the date for his eagerly anticipated medium-term economic plan from 31st October to 17th November. He made the announcement on 26th October after talks with Mr Sunak, who wants more time to finalise the details of the defining fiscal statement.
The Impact on UK Businesses
For UK businesses that operate internationally, the pound’s slump amid political turmoil is the latest economic challenge against a backdrop of decades-high inflation, an imminent UK recession, and the energy crisis.
- Inflation: In July 2022, inflation jumped above 10% for the first time in over four decades. After a small drop in August - to 9.9% - it reached 10.1% in September, equalling July.
- Recession: The UK economy unexpectedly contracted in August, reinforcing forecasts that it will slide into a recession before the end of the year.
- Energy crisis: According to the Federation of Small Businesses, UK companies have experienced a 424% rise in gas costs and a 349% rise in electricity costs since February 2021, causing rising energy bills for the average small business to reach over £28,000 – quadruple their level in early 2021.
A possible symptom of the pound’s demise could be even higher interest rates, which have already been hiked to a level not seen in the UK since 2008 in a bid to cool red-hot inflation. In the wake of the mini-budget, money markets were predicting the Bank of England base rate could almost treble to 6% next year.
The weak pound makes it more expensive to buy imports - from crude oil to food - pushing up prices. Therefore, the UK’s central bank may feel it has to continue raising interest rates to curb inflation - and the knock-on effect is potentially crippling for SMEs: the cost of repaying loans taken out to shield from the Covid-19 pandemic will spiral; their ability to secure affordable funding will be strangled; and the cost of mortgage repayments will continue to rise.
The spiralling price of importing goods, raw materials, and services from overseas is squeezing the budgets of SMEs across industries like manufacturing, textiles, shipping, travel, agriculture, energy, and technology.
For example, British manufacturers continued to scale back production in September as demand from the domestic and overseas markets declined and a weaker pound increased the cost of imported materials. Factory output dropped for the third month in a row, with the closely watched S&P Global/CIPS UK Manufacturing PMI posting 48.4 - a fraction higher than August's 27-month low of 47.3. A reading below 50 indicates that the sector - which accounts for around 10% of the UK economy - is contracting. Manufacturers experienced rising prices across a wide range of materials in September - from chemicals and electronics to foodstuffs, metals, packaging, plastics and timber.
The pound’s plight has exacerbated the economic hardship these businesses are already facing amid shortages and rising energy and transport costs. A recent study by Vodafone suggests SME owners across the UK are bracing for an uncertain year ahead, with more than a quarter (28%) admitting they won’t be hiring any new staff over the next 12 months due to the current cost of living crisis. The research also found that the rising cost of gas, electricity and fuel is the greatest challenge for half of SMEs (53%), followed by staff pay rise demands (47%), spiralling transport and distribution costs (30%) and more expensive raw materials (28%).
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