In his spending review yesterday Rishi Sunak said the “economic emergency” caused by Covid-19 has only just begun, as he warned the virus would mean lasting damage to growth and jobs.
Official forecasts now predict the biggest economic decline in 300 years.
The UK economy is expected to shrink by 11.3% this year and not return to its pre-Covid size until the end of 2022. Government borrowing will rise to its highest outside of wartime to deal with the economic impact.
The Office for Budget Responsibility (OBR) expects the number of unemployed people to increase up to 2.6 million by the middle of next year.
This means the unemployment rate will hit 7.5%, its highest level since the financial crisis in 2009.
Amongst other announcements made yesterday, the minimum wage – which has been rebranded as the National Living Wage – will increase by 2.2% – or 19p – to £8.91 an hour, with the rate extended to those aged 23 and over. Other rates were also increased. From April 2021, 16 and 17-year-olds will see their pay go up to £4.62 per hour, from £4.55 today.
The chancellor also announced a £4.3bn package of support to help the jobless get back into work.
So what does the spending review mean for businesses?
Clearly the situation is unprecedented in peace time. The size of the cost of Covid-19 is huge and the Government will need to find more money from spending cuts and taxes just to balance revenues on a day to day basis.
So businesses can expect to see tax rises announced in the March 2021 budget.
There is already speculation that the government could raise money from changes to Capital Gains Tax, pensions relief or self-employment taxes. However this will not be sufficient to cover the Covid-19 costs so we predict there will be some corporation tax, income tax, VAT or national insurance increases.
The big decision for the government will be to decide when to stop the support to the recovering economy – and when to start strengthening public finances by tax rises. The extreme uncertainty underlines how difficult that decision could be.
Businesses should strengthen their cash flow management now ahead of the end of supports and tax changes.
The most important advice we can give our clients is to take some time to plan ahead to look at maximising revenue and minimising or streamlining operating costs. We can provide you with templates and forecasts to do this or we can help you prepare accurate forecasts based on a number of scenarios and do a “what if” exercise on your business.
Please talk to us about how we can help you make it through the next few months and preparing for recovery.