The Budget, also known as the Financial statement, is an annual statement given in the House of Commons by the Chancellor of the Exchequer (currently Rishi Sunak).Its contents are the government’s plan for raising or lowering taxes, spending changes, and an outline of what the government will be spending money on, as well as a review of the nation’s current finances and the economic situation. Unusually, this year has had 2 Budgets: one on the 27th October, and one in March, as the latter was deferred from last October due to the pandemic. The Leader of the Opposition replies to the Budget speech and there is a period of debate over the Budget resolutions, but generally most Budget Resolutions come into effect four days after the House has had time to debate them, so the implications are pretty immediate even if there is some initial disagreement.
So, what are the two biggest takeaways we should be aware of?
Despite the Conservatives being historically quite anti-taxation, particularly for businesses, the Chancellor has had to balance increased spending due to the pandemic, the need for green investment amidst a climate crisis, and ever-increasing social care and healthcare demands with this precedent, so this Budget has seen an unusual propensity for tinkering with tax rates to raise revenue for the Government. Taxes are the main source of government revenue, with the three biggest streams of income being from income tax (£198 bn 2020/21), National Insurance contributions (£144 bn) and VAT (£119bn), so any change in these can boost the Government’s budget but deflate millions of pockets. Had the Chancellor not topped up his spending plan in this Budget, a third of the March tax increases could have been reversed, with Sunak now relying almost entirely on tax to respond to the holes in public finance. Chancellor has now raised taxes this year by approximately £40 bn, including a new ‘health and social care levy’, making the tax burden an overall 2.7% of GDP higher than for 2019/20. This is significant because, from a business perspective, their customers will now have less money to spend, although this is marginally offset by an increase in minimum wage. Business involved in alcohol retail may experience some menu costs from the change in alcohol duties, now simplified to correspond to alcohol strength as opposed to the previous alcohol categories, but also see an increase in sales as customers benefit from a real (as opposed to nominal) decrease in prices of some alcohols when taking into account inflation. Overall, businesses will be looking at industries affected most by certain tax changes, and monitor general spending patterns on different categories of products (inferior, normal, luxury etc.) to adjust prices and maintain steady profits.
The Cost of Living and Inflation
The Budget speech is followed by a report from the Independent Office for Budget Responsibility (OBR) on how the economy is doing, including expected inflation figures. The OBR expects inflation to peak at over 4% in the next 3 year period, double the Bank of England’s critical target of 2%. Too much inflation is never a good thing for the economy as it can lead to uncertainty for businesses and investors, as well as an increase in those living below the poverty line if wages do not rise in line with inflation. For Sunak, though, this seemed to indicate economic growth and confidence, with this Budget being one ‘to usher in a new age of optimism’. Little was done in this Budget to offset the rising cost of living, with the killer combination of tax increases and high inflation promoting little hope for rising standards of living in the coming years. For business, this could again lead to a decline in sales as parts of the public find themselves poorer and less inclined to spend on luxuries. On the other hand, inflation in an economy can also be a sign of long-term economic growth, if the inflation is being caused by investment in capital or labour, and can therefore promote an attractive economy for foreign investment, and indeed domestic investment, all good news for businesses. While various green initiatives are in other Government plans, and the sentiment of reducing environmental impact is reflected in the Budget by increased funding on domestic public transport and the announcement of spending reviews of net zero strategies such as low carbon heating and hydrogen fuel, many businesses will not see money offered to them for green investment just yet. Businesses will have to decide for themselves whether to go greener or potentially cut costs in the short-term to survive by refraining from investment.
Overall, the Autumn Budget built on some major tax increases and morbid economic forecasts from the rest of the year, and it will be interesting to see how businesses react to these changes from the Budget both in the coming months and later years as the country moves into post-pandemic inflation, as well as slow growth in living standards for their consumers and pressure on businesses themselves to go greener. At least we can enjoy somewhat lower prices of alcohol…