December economic and business overview
December 4, 2023
In this month’s business overview, we take a closer look at the Autumn Statement and consider its real impact on business investment
It’s a well-worn joke that asking two experts about the economy is likely to get you at least three opinions or that if you laid all the world’s economists end to end, they still wouldn’t reach a conclusion. So, it may not be surprising that within nine days of each other, the Chancellor was using his Autumn Statement to declare that the economy ‘had turned a corner’ while the Governor of the Bank of England was warning that the economic outlook was ‘among the worst he had ever seen’.
The Autumn Statement
The clickbait headline was a marginal 2% employees’ national insurance give-back from the tax bonanza from previously freezing personal tax bands and allowances. There was confirmation too that the pensions triple lock would be maintained, there would be a near 10% rise in the national living wage and benefit entitlements would somewhat grudgingly be uprated. There was also some business rates relief for smaller businesses and for key consumer-facing sectors, such as retail, hospitality and leisure.
Underlying this, the core and key objective of the measures was an attempt to boost the UK’s pitifully poor level of business investment by confirming that the “full expensing” capital allowance, which allows companies to deduct spending on new machinery and equipment from profit would become permanent, having been introduced temporarily in the 2023 Spring Budget. We comment below on the likely effectiveness of this.
Economic background
The latest data available before the Autumn Statement painted a mixed but generally poor picture of the UK economy:
- GDP growth for Q3 2023 was zero
- Corporate insolvency filings for October were 52% above pre-pandemic levels in October 2019 and 39% higher on a cumulative ten-month basis. There will now be over 26,000 business failures this year, the second highest level on record.
- Experimental estimates by the Office for National Statistics (ONS) for June to August 2023 show a 0.2 percentage point increase in the UK unemployment rate to 4.2% compared with the previous quarter.
- Job vacancies fell by 58,000 to 957,000 in the quarter to October 2023, mainly because posts were withdrawn by cautious entrepreneurs rather than by jobs being filled through hiring.
The good news was that CPI inflation fell from 6.7% in September to 4.6% in October as last year’s energy price peak dropped out of the calculation, but food inflation remained stubbornly high at 10.1%.
What does the Office for Budget Responsibility (OBR) think?
The OBR commentary accompanying the Autumn Statement seems to come down rather closer to the Bank of England position, pointing out amongst other issues that:
- Despite the proposed tax cuts, the tax burden will reach 37.7% by 2028/29, a post war record.
- Living standards are predicted to be 3.5% lower in 2024/25 than pre-pandemic, the largest fall since ONS records began in the 1950s.
- Government departmental capital spending has been frozen, indicating that it will fall £19.1bn in real terms just as the business community is being wooed to invest as never before.
- The OBR’s forecast for GDP growth for 2024 has been slashed from 1.8% to 0.7% and for 2025 from 2.5% to 1.4%.
The problem with UK business investment
One pundit worked out after the Chancellor’s statement that its tax and other incentives to business to invest, which could cost £10bn a year, might only increase investment by a total of £14bn over the next five years.
However, the relationship between risk and reward on investment is not the real point. The far larger question is if and when the government will embrace the reality that nice as tax incentives for investment may be for ambitious businesses, they come well down most entrepreneurs’ list of motivating factors. Far more persuasive requirements include:
- The availability of a suitably skilled local workforce.
- Good quality and affordable housing for staff.
- Quality infrastructure, including transport links, education resources and healthcare facilities.
Most important of all and top of most research findings on investment incentives is policy consistency, which has demonstrably been lacking for at least one if not two decades.
Political inconsistency tends to negatively impact business confidence and with seven Business Secretaries and six Chancellors in the past seven years, policy consistency within the UK economy has been lacking.
There is clearly much for the government to do to re-assure the business community that it understands the need to deliver on these other factors, as well as offering tax incentives.
How can businesses fund investment?
Business investment requires funding, which only relatively rarely comes entirely from ongoing profitability and cash generation. Many UK businesses, particularly SMEs, are more heavily borrowed than before the pandemic. Accessing extra finance for investment projects will inevitably be difficult under these circumstances and with prospects for the economy so uncertain.
Calling in expert independent help to identify finance sources, design and pitch the proposal and negotiate the best possible terms makes a lot of sense and is likely to open up a far wider range of funding options than most management teams can achieve on their own.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.