2014 budget a success or lukewarm boost for UK businesses

The message Chancellor George Osborne desired to send out when conducting his Budget this week was crystal clear: “We need our shutterstock_377905594businesses to export more, build more, invest more and manufacture more”.On the surface, it can be argued that this year’s budget was an undeniable success for Britain’s embattled businesses, with the Chancellor identifying a series of assistive measures that are intended to give UK corporation’s and exporters the much needed boost that they have been calling for.In particular, the announcement that the yearly 100% tax allowance for investment against corporation tax has been raised twofold to £500,000 will go a long way to improving investment levels in the country, whilst the policies extension till the end of 2015 should concretise this trajectory.The chancellor outlined that the move will grant the lion-share of Britain’s businesses full tax relief on plant and equipment investment, which should pick up the vital area of labour productivity levels.Lee Hopley, chief economist at the EEF manufacturers’ organisation, praised the Chancellor’s increase of the investment personal allowance, positing that “would capture more of manufacturers’ investment on new equipment and technology, which are key to a shift in our productivity performance”.

The value of this measure is all the more important considering that the current limit stands at just £250,000, and it was previously expected to drop down to a substantially smaller £25,000 by the start of 2015.

Indeed, the Office for Budget Responsibility has forecasted that the measure will incur an extra £1 billion worth of investment in the future, and has upgraded its estimate for business investment growth this year to 8%, almost 33% higher than its previous prediction made earlier this year.

Another welcome measure that was identified to improvement investment levels was the increase in the level of development tax credit available to SME’s who have suffered large losses from investment, with the Chancellor announcing that this will rise to 14.5% from the current 11%. This means that a business that has experienced a £200,000 loss from investment would be able to acquire over £15,000 more through the initiative than before, and will hopefully encourage higher levels of investment moving forward in the future.

Furthermore, the confirmation that the Seed Enterprise Investment Scheme will run on a permanent basis should also encourage further business investment as it will grant a number of aspiring new companies to receive tax breaks to assist them with the funding of their start-ups.

Collectively, these policies will go a long way to improving investment levels and confidence in the country, and significantly, they have addressed the issues of labour productivity and employer spending power together, which is a credit to the Chancellor and the current administration.

Exporters given boost

Similarly, Mr Osborne outlined a number of new measures that are intended to pick up export levels in the country, and help the Chancellor realise his overarching goal of making Britain one of the globes most powerful exporters.

The announcement that the government will be raising the quantity of credit available to foreign investors in order to purchase itinerary and services from British exporters will rise to £3 billion from the current £1.5 billion is the key measure to consider in this area.

This should hugely impact export levels, whilst the supplementary measure that the interest on these loans will be decreased by 33% should reinforce the impact of this policy. If Britain truly wants to become one of the exporting capitals of the world, then encouraging investors through attractive loan arrangements is an excellent place to start, though future policy to concretise and extend this will need to be implemented to maintain an upward trajectory.

The government has previously said that it is aiming for the UK’s total exports to exceed £1 trillion by 2020, and wants around 100,000 more British businesses to be engaging in the export industry by this time.

The Chancellor’s measures have certainly pushed the country in the right direction to achieve this, though whether this is sufficient has been an area of huge contention since his Budget was made on Wednesday afternoon.

Not far enough?

Despite the overwhelmingly positive reaction to the Chancellor’s budget from businesses, certain factions have criticised Mr Osborne for failing to go far enough with his supportive measures.

In particular, the short term scope of his new policy, his complicating of the tax system, and his failure to be more radical in his bid to boost export levels have been given as the primary criticisms of his Budget.

Accountancy firm BDO argued that the Chancellor could have implemented a broader range of new policies that would have impacted export levels far more substantially than his current measures likely will, and criticised him for failing to take full advantage of the chance presented to him this year in his Budget.

BDO outlined that the Chancellor should have announced that he would be reducing the amount that employers are obligated to contribute to the government through National Insurance, as this would lower the costs of hiring new employees.

Similarly, the implementation of a tax break for new factories would have boosted the number of jobs available for aspiring workers in the business sector by giving employers a greater level of finance to create new jobs, the BDO argued.

Deficiencies in his annual investment allowance increase have also been highlighted, with the primary criticism being that the AIA is solely applicable to plants and machinery, and not the more important area of intangible assets, which comprises over 50% of Britain’s total investment.

Instead, tax relief in this area of investment will be subject to a different exemption, and a number of organisations have argued that this will lead to severe administrative problems and confusion about the nature of tax reliefs for businesses later on down the line.

The Centre for Policy Studies raised this point well, arguing: “Radical savings and pension reform, more income tax cuts and a boost to exports are all welcome. But this Budget also increased tax complexity. What is needed now is a dynamic programme of supply side reform, clearly focused on increasing productivity”.

“When the Government came to power they set out the corporate tax road map. It set out clear a trajectory for tax rates,” said Helen Miller, an economist at the IFS.

“I think what we’ve seen more recently in budgets is more tinkering around the edge that probably isn’t going to have any long-term effects.”

“The really unwelcome theme to these [measures] is many are temporary in nature and frequently changed. That adds uncertainty and fundamentally detracts from the positive effects that they’re trying to have on investment.”

Whilst Ms Miller’s remarks may be overtly critical, she raises a good point that the measures are only set to run for a limited term, and in their current carnation will not enhance investment levels in the long term.

However, these issues can be remedied and addressed in the post-election era, where an air of normality will return to politics and economics, and the supplementary polices that the centre for policy studies suggested can be formulated in a clearer and more insightful manner.

Exports need to increase by 10.4% each year from now in order for the UK to reach its export targets, and this will likely not be achieve based on the announcements made in the Budget this year. Longer term investment incentives need to be introduced that span the length of the decade, and the current tax relief polices need to be reconsidered so that they are more focused on intangible assets.

However, despite the underlying issues and outstanding deficiencies in the Chancellor’s budget, it was nevertheless a much needed step in the right direction for improving both investment and export levels. Start ups have been made far easier through the tax reliefs identified in the budget, whilst short term investment incentives have been enhanced immeasurably. The logistics for UK employers to enhance their workforce has also been provided, whilst foreign investors have been given a hugely attractive offering that should entice them to our market and bolster our exports.

It can be argued that providing supplementary measures are introduced in the future to build on the likely impact of these, the UK may be looking at a bright future indeed.

Written by: Mike Smith

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