Some great initiatives set out by Rishi Sunak earlier this month to kick start the economy which shrank 10% in 2020 off the back of the global pandemic (as well as Brexit related challenges).
Some of the key aspects for business owners include:
- The coronavirus job retention scheme will be extended in full until 30 June 2021 and will be phased out over the following three months
- Government to continue paying 80% of employees' wages for hours they cannot work
- Employers to be asked to contribute 10% in July and 20% in August and September
- 600,000 more self-employed people will be eligible for help as access to grants is widened
- Minimum wage to increase to £8.91 an hour from April
- Main rate of corporation tax will be increased to 25% from April 2023 (profits over £250k)
The first steps of these initiatives have helped put UK on a course to run a 6.5% unemployment level , a hug deviation from the widely expected 11.9%, whilst the economy is expected to achieve pre covid levels by mid 2022. However, the total pandemic related spending during 2020/21 will amount to £407bn: £14bn more than the amount of income tax that will be produced over the same time period.
The covid spending bill has hit £407bn as the UK’s debt pile is overshadowing its GDP.
Instead of raising tax rates, Sunak has frozen the income tax thresholds (personal allowance will be frozen at £12,570 from April until 2025/26 and the higher threshold rate will be kept at £50,270 until 2026), which is estimated to bring in £19.3bn over the next five years.
Good news for small business from a corporate tax perspective as firms making less than £50,000 will see their corporation tax maintained at 19%.
All eyes are very much going to be on the continued roll out of the vaccine (s) and the efficacy against future strains of the virus to ensure that the government is not continually fighting the covid fire, but there are still challenges to kickstarting the economy.
Looking at the supply of money (M2) as per the red line below, unsurprisingly we have seen a huge upward move following the stimulus measures that are being taken place; the challenge however to is to ensure this money is getting into the real economy and circulating to all parties (velocity). Interestingly, the amount of money in circulation has plummeted, primarily as banks have shored up cash on their balance sheets. The ability to access loans for small businesses has been challenging along with convoluted application processes.
Households have also built up strong personal balance sheets over the past year so the £125bn question is whether consumers will spend this accumulated wealth to push the economy and businesses forward.
Small businesses need to remain flexible over the short to medium term, the most successful of which have been able to adapt quickly. In practice, a focus on moving fixed costs to variable costs in order to scale up if demand increases, but also being mindful that the government lifeline is only a temporary measure. Economics plays out in the end and planning for multiple scenarios can survival after the storm.
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