Tuesday March 5, 2024

What’s likely to be in the Chancellor’s red box?

Often the Chancellor’s Spring Budget is an opportunity to provide industry with new funding, infrastructure investment and fiscal giveaways. However, the challenging state of the public purse and the need to persuade voters is likely to make this year’s Budget a more consumer-oriented event.

Typically, Chancellors look to lower taxes ahead of an election, with the potential to raise them (or provide their opposite numbers with the welcome task of doing so) at the start of the new administration. However, organisations ranging from the Office for Budget Responsibility to the International Monetary Fund and the Institute for Fiscal Studies have all questioned whether there is sufficient fiscal headroom to facilitate lower taxes. With the Treasury needing to comply with its own fiscal rule of reducing the national debt and under pressure to protect public services at a time when local authorities are recording significant funding shortfalls, the Chancellor has limited tools at his disposal.

For businesses in particular, the likelihood of a cut to Corporation Tax is unlikely given it was only increased (from 19% to 25%) a year ago. Meanwhile, it would seem an unlikely move politically for the Treasury to amend Capital Gains Tax – as is often rumoured at this time of year – so close to an election.

So, what could the Chancellor realistically deliver in the short-term to help boost business growth? We can see two broad areas for potential action.

Encouraging Investment

The biggest announcement for business in the last Autumn Statement was that full expensing – which essentially gives companies 25p tax relief on every £1 they spend on qualifying plant and machinery – would be made permanent. That was a particular benefit to businesses in the tech, media and construction sectors, giving them the confidence to support long-term investment strategies.

However, some investments were excluded from the scheme, including second-hand plant and machinery, buildings, land, cars and assets that are leased or used for leasing.

For many smaller and medium-sized businesses, leasing is a less risky, more cost-effective option. So, the Chancellor has an opportunity to broaden the scope of full expensing to include a wider range of investments.

Supporting skills and access to labour

Labour shortages and skills gaps are also big issues for a diverse range of UK employers, contributing to broader economic performance. According to the CBI, seven in ten UK firms (71%) experienced labour shortages during 2023.

One solution could be to reform the Apprenticeship Levy to encourage more investment in training. Many businesses find the current system complicated, restrictive and difficult to access, which means much of the available funding is going unspent. Providing firms with more flexibility as to how they use the levy has the potential to encourage more uptake – particularly in digital and green skills that are likely to drive future growth of the economy. Doing so would likely be possible at a lower cost than committing to new investment.

There is also a looming issue around the provision of free childcare, which was announced in the 2023 Spring Budget to help more parents stay in work and get the economy growing. However, it now seems clear that there aren’t enough childcare places to support this policy, which threatens to undermine the initiative. Action may well be forthcoming here.

Tax exemptions for firms offering health benefits have also been proposed as a way of tackling the high number of workers who are on long-term sick leave. However, how immediately beneficial this would be remains to be seen.

What can we expect?

Despite the need to balance the books, it wouldn’t be a Budget without a left field announcement to boost popularity. If we are to see an announcement, SMEs are likely to be the major beneficiary. Raising the £85k VAT registration threshold could be one way to help unlock the growth potential of small firms. And reinstating tax-free shopping for tourists could also be an attractive option, especially for the hospitality and retail sectors which continue to struggle.

Ultimately though, the Chancellor will need to strike a delicate but fairly limited balance between being the keeper of fiscal responsibility and the booster of electoral ratings. While business leaders will likely be tuning in as always, we can expect the highlights package to be relatively short.