George Osborne promised a “budget for business” and that was largely what he delivered. There was a lot in the Chancellor’s fifth budget to please the business community and, on first reading, few specific measures to cause alarm.
Osborne deserves credit for limiting himself to a fiscally neutral package, despite a strong uptick in growth. Even though the Office for Budget Responsibility raised its 2014 growth forecast to 2.7pc, up from 1.4pc at the time of last year’s budget, the Chancellor’s measures amounted to a tiny £0.5bn giveaway in 2014/15, and a small fiscal squeeze over the next 5 years as a whole.
The Chancellor still found scope, though, to boost two key areas of commercial activity – business investment and exports. Both have badly under-performed in recent years yet both are crucial if this imbalanced, consumption-led UK growth spurt is become a sustained recovery.
At the heart of this budget was a doubling of the annual 100pc tax allowance for investment to £500,000. Back in 2012, the Chancellor raised this allowance ten-fold, to £250,000. With this rise due to expire next month, business leaders had been lobbying hard for an extension.
Osborne not only doubled the allowance but extended it to 2014/15, at a cost to the Exchequer of £2bn. With UK investment routinely around 12pc of GDP, compared to 18-20pc in the US and Germany, the Treasury will hope additional capital spending provoked by bigger tax breaks will promote growth, generating more tax revenue in turn. The Chancellor also revealed that business rates discounts and enhanced capital allowances for enterprise zones will continue for another three years.
This budget also included meaningful measures to promote exports. Since the 2008 sub-prime collapse, sterling has fallen by around a fifth on an inflation-adjusted trade-weighted basis, despite some recent appreciation. Still, Britain has continued to run a series of record external deficits, with the latest figures showing our trade shortfall getting wider, as exports plunged 4pc during the year to January 2014.
The government’s rhetoric has long suggested export-boosting measures were in the works. David Cameron, as well as the Chancellor, has emphasized that the UK is in a “global race”, stressing the need for more British exports, particularly to fast-growing Eastern markets. While such trade has grown lately, the combined value of UK goods and services sold in the largest emerging markets – Brazil, Russia, India and China – amounted to less last year than our exports to Belgium.
On cue, Osborne yesterday pledge to overhaul UK Export Finance’s (UKEF’s) direct lending programme, doubling it to £3bn and cutting interest rates to the lowest permitted levels, so provide competitive financing that should help UK companies win more contracts overseas. British firms have long-complained that other Western nations provide more effective financing facilities to exporters. Certainly, French and German state export agencies supported overseas sales worth £35bn and £8bn respectively last year. The UKEF total, meanwhile, was just over £4bn.
While the details are yet to be finalized, it must be hoped this shake-up of British export finance extends trading opportunities to a broad range of firms, helping to make up lost ground on other advanced economies and turn successive trade deficits into a surplus. Then, our external sector would start contributing, rather than acting as a drag on economic growth.
Along with encouraging investment and exports, the Chancellor also tried to lower companies’ energy bills, particularly those of power-intensive manufacturers. Osborne argued that energy costs would be cut in general terms through investment in nuclear power, renewables and shale gas. But he also announced a specific capping of the carbon price support rate at £18 from 2016–17 to 2019–20. While the Climate Change Levy remains, which will disappoint many businesses, this freezing of carbon tax at 2015 levels will hopefully mean power producers can rein-in recently rising corporate utility bills, particularly for industries such as steel and cement manufacture where energy can make up 40pc of costs. We shall see.
This budget could also have contained more for small- and medium-sized enterprises, in my view. Britain’s dynamic SMEs account for over half our output and two-thirds of all employment. SMEs will benefit from higher capital allowances, and possibly export support too. Many will also welcome Osborne’s decision to make permanent his Seed Enterprise Investment Scheme, designed to encourage start-ups and originally due to expire in 2017. Apart from that, though, there were few SME-friendly measures.
With one in three such firms involved in construction, the Treasury will argue measures to boost house-building amount to de facto SME support. Again, though, this part of the budget was weak compared to the scale of the challenge.
Budget measures will support the construction of over 200,000 new homes over 5 years, the Chancellor said, with 120,000 resulting from an extension to 2020 of the controversial “Help to Buy” scheme. There will be major building programs in Barking and Brent Cross, with 15,000 homes going up in a new garden city at Ebbsfleet. Yet this looks feeble given that the UK is currently building less than half the 230,000 new homes it needs each year just to meet current demand.
Osborne is congratulated for the pro-business measures in yesterday’s budget – which, if we’re lucky, will help to consolidate and sustain the UK’s economy recovery. He also deserves credit for taking a broadly neutral fiscal stance. The danger is that next year’s budget, coming just before an election, won’t be nearly as responsible, and not nearly as business-friendly.