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Budget 2021: what it means for British business

Chancellor Rishi Sunak has promised to back businesses and usher in a “higher productivity economy” but will the new policies achieve what he promises?

Chancellor Rishi Sunak used the Budget today (27 October) to usher in a “higher wage, higher skill, higher productivity economy”. 

Unusually for a Budget, many of the Treasury’s set-piece announcements were revealed ahead of the Chancellor’s speech. These included a rise in the National Living Wage, increased spending for the NHS to address the patient backlog and £1.8bn earmarked for the construction of new homes.

Within the announcements, Sunak highlighted the importance of the businesses sector in inspiring economic growth, saying: “We are backing business because our future cannot be built by government alone but must come from the imagination and drive of our entrepreneurs.”

Providing a background to the Chancellor’s spending review was a slightly improved underlying fiscal outlook from the Office for Budget Responsibility, which forecast the economy to return to pre-Covid levels at the turn of the year. However, Shadow Chancellor Rachel Reeves claimed that businesses currently suffering from a supply chain crisis “won’t recognise the world that the Chancellor is describing”.

So what are the key announcements and what do they mean for British business?

Business rate changes

Organisations hoping to see an overhaul of the business rate system will be disappointed. Cuts to the tax, which are based on the rateable value of a business’s premises, were promised in the Conservative’s 2019 manifesto but are yet to materialise.

Ahead of today’s Budget, the Confederation of British Industries (CBI) and 41 UK trade associations issued a joint statement describing the current business rates system as “uncompetitive, unproductive and unfair”.

CBI chief economist Rain Newton-Smith said: “With up to half of business investment potentially subject to business rates, it has literally become a tax on investment. Action to stimulate investment, starting with business rates reform, unites firms spanning the whole economy.”

Sunak claimed that calls to abolish the tax, which raises £25bn a year for the treasury, are “completely irresponsible”. In an attempt to address existing issues with the current system, he announced several reforms to make it “timelier and fairer”. 

These include more frequent revaluations of business premises - every three years rather than the current five; a 12-month rates holiday for businesses making property upgrades; and relief for green property investments, such as solar panels and heat pumps.

Under the current system, companies tend to see their business rates rise from making such investments as they typically increase the value of the property.

Commenting on the business rate changes, CBI director-general Tony Danker says: “The Chancellor made real strides in making the system more palatable for businesses in the shorter term. More frequent valuations, wider reliefs and improving the incentives for firms to decarbonise their premises is what firms have been calling for. 

“But the hard truth is that wholesale reform to unlock investment was rejected today. The Government missed the opportunity to truly reform a business rates system that diminishes Britain’s high streets and factories.”

However, businesses in the retail, hospitality and leisure sectors will be able to claim a 50% discount on business rates to help the industry’s post-Covid recovery. With previous Covid-19 support measures now winding down, the move was welcomed by UKHospitality’s chief executive Kate Nicholls. 

However, she adds: ““Positive as these announcements are, hospitality remains incredibly fragile, facing myriad critical issues. Rising utility bills, wage bills, and food and drink prices have resulted in 13% inflationary costs that businesses are having to absorb at the same time as they navigate severe supply chain issues and chronic staff shortages. 

“Given this toxic cocktail, it is imperative the Government go further to support businesses in our sector.”

Minimum wage workers get a pay boost

Those aged over 23 and on the National Living Wage will receive a 6.6% pay increase, taking their hourly wages from £8.91 per hour to £9.50. Minimum pay rates for those under this age group and those on apprenticeship schemes will rise by the same percentage. 

While welcomed by workers and unions, for businesses this represents an additional outlay at a time when the costs of operating are on the rise. 

The British Chambers of Commerce head of people policy Jane Gratton says: “With rising energy costs, higher raw material prices, high levels of debt as a result of the pandemic and tax increases due, many firms are facing a cashflow squeeze. So while businesses support the minimum wage, the size of this increase – with less than six months’ notice – will cause significant concern, especially with so many smaller firms already struggling.”

She suggests that the best way to sustainably increase wages is through upskilling and productivity improvements, adding: “If businesses are to lead our economic recovery, they desperately need room to breathe, rebuild their finances and have the confidence and capacity to invest, including in the training and development of their people.” 

The Federation of Small Businesses also raised concerns, stating that without an extension to the small business Employment Allowance, which covers the first £4,000 of employer National Insurance Contributions, their members would struggle to keep people employed. 

The national chair of the organisation, Mike Perry, warns that, without an increase in the Employment Allowance, “the combination in April of higher wage bills and higher tax bills will see many more than the forecast of 50,000 people added to unemployment queues”.

Skills and talent

With businesses across the country currently facing labour shortages, Sunak announced £3bn of spending in a so-called “skills revolution”. This will go towards extending T-levels, traineeships and ‘skills boot camps’ to help people develop skills in areas such as artificial intelligence and cybersecurity. 

Under new immigration policies, a Scale-Up Visa aims to make it easier for fast-growing businesses to hire talent from abroad. Similarly, a new Global Talent Network connecting UK businesses and research institutes with talent in the San Francisco Bay Area and Boston in the US, and Bengaluru in India, is scheduled to launch next year.

A new skills programme to improve adult numeracy skills was also announced. Called Multiply, the £560m, three-year plan aims to improve basic maths skills without which, the Chancellor, claims people are twice as likely to be unemployed by the age of 30.

Responding to the skills investments, the Institute of Director’s chief economist Kitty Ussher says: “While promising a ‘skills revolution’, the actual measures that were announced, while welcome, felt piecemeal and will not give business confidence that we have a coherent plan to prevent future labour shortages for our post-pandemic era outside the EU.”

However the CBI was more optimistic, claiming that the agile approach to improving skills shown with the boot camps “must now be the watchword when it comes to revolutionising the skills landscape, including for apprenticeships”.

R&D rule changes

The Chancellor was also keen to ensure that the current challenges facing businesses didn’t come at the expense of investment in innovation and research and development. During the Budget he claimed spending on R&D would reach £20bn a year by the end of the current parliament, taking R&D spending to 1.1% of GDP.

Changes to the research and development tax relief will see it expand to include cloud computing and data, while changes to subsidies will ensure companies invest in domestic R&D projects rather than spending abroad.

Danker says: “The Government’s commitment to innovation will be a central cog to the UK’s prospects to leading in the industries of the future. This will be essential to be globally competitive so the Government must stick to these targets in the coming years.”

Climate change

Despite the UK hosting COP26 next week, investment in tackling climate change was surprisingly absent from the Budget. Beyond the relief for green property investments and a net zero innovation fund, climate change was barely mentioned. 

In contrast, a new policy that reduces Air Passenger Duty for domestic flights and a freeze to fuel duty mean that two big emitters will receive a tax cut. 

Rebecca Newsom, head of politics at Greenpeace UK, says: “The climate emergency should have been the centrepiece of this spending review ahead of the most critical UK-hosted climate talks in years, but Sunak spent more time discussing duty on domestic cider.

“The Chancellor appears to have delivered just 5% of what’s needed to roll out green homes, clean transport, nature protection and support for workers to transition to green jobs, and is actively making things worse by making it cheaper to fly between UK cities.”