The autumn budget: three reasons for caution

Was this week’s budget the work of a skilled Chancellor or a lucky one?

In truth, it was neither.  As those more fluent in the machinations of party politics will recognise, it was the budget of a Chancellor who is desperate to be Prime Minister.

Rishi Sunak is a man with his eye on the prize.  He knows full well that maintaining his status as “the most popular politician in Britain” will do him no harm on what he might hope will be his short journey to Number 10. 

Popular politicians are spending politicians.  And whichever way you turn, the Chancellor had goodies for everyone.

Fancy a pay rise?  You’re in for a treat.  Worried about crime?  A cash boost for courts and prisons is coming.  Still annoyed about the foreign aid cut?  That will be back on track soon enough.

Whether you’re a museum lover, a public sector worker or enjoy flying within the UK, you’ll find something to raise a glass to.  And with duties cut on your favourite English sparkling wine, you might be able to raise more than one.

Just one snag.  It’s not at all clear how we’re going to pay for this.  The Chancellor will boost spending and cut taxes.  Economic growth will bank a dividend, but there’s little mention of wealth-generating reforms.

Perhaps we’re just being cynical.  Or perhaps Rishi simply hopes this will be someone else’s problem by the time the chickens come home to roost.  All being well, it won’t land in his in tray.  It will sit squarely with Prime Minister Sunak’s Chancellor of the Exchequer.

Here are just three reasons why businesses and wealth creators should be cautious about today’s budget:

1. Optimism makes for a good speech but it’s not enough for an economic strategy

Economic forecasts are certainly better than feared.  Growth is set to rebound by 6.5% this year, with the economy reaching pre-pandemic levels by 2022.  But beneath the headline figures, problems lurk, with growth forecasts receding to 2% in 2023 and between 1.5%-1.75% from 2024-2026. If this proves to be the case, short term growth may look more like temporary respite than the linchpin of “an economy fit for a new age of optimism”.

Borrowing will fall from 7.9% of GDP to 3.3% next year.  But it will still stand at 2.4% come 2023.  It’s next to impossible for the Government to balance the books this Parliament.  Saying that, there’s nothing that can loosen up the “fiscal rules” like a general election. Just watch.

The Office for Budget Responsibility (OBR) also forecasts that inflation will average 4%.  The reasons for this might be understandable.  But the belief that it will simply correct itself cannot be taken for granted. 

2. Read the small print

The best things in life may be free but “Government goodies” rarely are.

Let’s take the business rate relief for hospitality, retail and leisure.  Undeniably welcome.  At the same time, however, business rates will now be revaluated more frequently.  Small businesses must live in fear of a rate rise every three years rather than every five.  Financial planning just got harder.

Then there’s the rise in the living wage to £9.50 an hour, an increase of 6.6%.  But didn’t we just talk about inflation hitting 4%?  This might not feel like the pay boost that many had hoped for.  And has history has shown, when wage rises become the solution to rising costs, we will quickly get caught in a vicious inflationary circle.

3. Hoping for growth is not the same thing as investing in it

The Chancellor is ruling out more borrowing.  He promised both to cut taxes and boost spending.  All his hopes are pinned firmly on economic growth.  Yet the budget was staggeringly light on anything that might create the conditions for wealth creation.

A £1.4bn global investment fund.  More money for the business bank.  Additional tax credits to boost investment in cloud computing. 

But for all the talk of tax-cutting (and there were certainly some strong words), Britain now has the highest tax burden since the 1950s.  Conditions for sustained growth are far from ripe.

On the face of it, this wasn’t a bad budget for small businesses.  Rate relief is welcome.  Several tax and duty rises have been scraped or delayed.  Some sectors will even benefit from tax credits and funding to boost worker skills.

But there’s one crucial thing this budget fails to acknowledge.  It is businesses, particularly small businesses that will fuel the much-hyped economic recovery.  The very recovery on which the multitude of spending pledges are predicated.  It doesn’t create the classic conditions that businesses need to thrive.  Nor does it point towards any other credible road map for the small business revival.

Government needs to think again.  It’s time to grasp the realities of recovery.  The Chancellor must recognise his role in setting the scene for it.  If he fails to do so, he might find that he’s been banking on a dividend from an economic recovery that he’s failed to nurture.

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