Budget Statement – What was not said?

It is always fascinating to analyse the pre and post budget commentary. This time, there was an abundance of excellent and generally positive coverage. The commentators were broadly happy with the content and the way in which this addressed the need for decisive but measured action.

It was also interesting to see how the Government’s spin machine kicked in. For the first time it had a chance to manage the event without the normal raucous background of a full House of Commons. It orchestrated it well and the Chancellor did a great job in presenting a high-quality TV orientated presentation.

It would be difficult to argue that many of the issues and policy decisions announced were at least in part, unhelpful to the South West economy. There was certainly a realisation that there is a need to encourage investment, to recognise the fragility of small and micro businesses and to put some real substance behind the levelling up agenda.

Far more interesting, however, is what the Chancellor did not say. I have highlighted a number of areas where we could reflect on either his silence or perhaps missed opportunities.

1. High Street Retailing

Additional support has been proposed for the revival of high streets and a priority list produced as to where funding will be made. Unfortunately, the interventions do not match the urgency of actions required. Whilst we may not be living through the death of the High Street, we are certainly living through the death of the High Street as we know it. During 2020, 16,000 shops closed. From the start of this year to the end of February, a further 925 shops were closed. The new online owners of Topshop and Debenhams have left behind 15 million sq. ft. of empty stores. Rent collections from landlords average around 40% of the totals which should have been paid. Radical treatment has been undertaken by some shopping centre owners. The unloved Broadmarsh Shopping Centre in Nottingham has become a wildlife reserve. In the famous Bluewater Shopping Centre in Kent, a new 700m zip wire has been installed to try and attract and retain customers. Perhaps most significantly, Amazon has just opened its first physical store outside the US. Trading as Amazon Fresh, this is a contactless, till free, store. Banks of cameras study shoppers and their habits. Direct billing via mobile phones is the point of payment. There is apparently a scarily accurate level of recording goods being purchased even when customers change their minds or pick up and put down items several times. Even the mighty John Lewis group is entering into a complete re-think of its department stores. There will be a sequence of closures, replaced only by a series of mini department stores which are co-located in Waitrose supermarkets. The reality is that both consumers and the retailers have learnt how easy online retailing is. The intermediaries who pick, box and transport the items offer such good service that predictions for a further rapid increase in online retailing are difficult to contradict. The UK has been one of the fastest areas of growth in online shopping. In 2020 the UK was averaging around 25% online retailing, compared to 20% in 2018. Today that figure is well over 40% and rising. The Chancellor’s announcements remind me of King Canute’s ill-fated attempts to order the tide to stay at sea and not come into shore.

2. Business Rates

There has been a constant campaign waged across all sectors to highlight the inequity of this tax. Not only does this have a huge effect on the bottom-line profit for many retail and hospitality businesses but it is regarded as having a negative impact on business investment. Government policy has been to drip feed small allowances, particularly for the benefit of small and micro business occupiers. The budget however was silent on the key issues of whether an alternative tax will be put in place or that there should be a move away from the current basis of assessment, which is levied against property valuations of 2015. It is clear that this is throwing up hugely inflated valuations. It had been hoped that there would be a re-evaluation, which would have taken account of both COVID19 and the impact of online trading. The simple fact, however, is that the Government raises around £30 billion per year from this tax and has not yet come up with an alternative solution which could replenish this pot.

3. Industrial Strategy

For many years “businesses have been crying out for a North Star to follow for investment and strategic decisions”. The first Prime Minister to heed this call was Theresa May back in 2017. The Government produced an initial draft (which outlined 142 policy initiatives) of its national Industrial Strategy, which would have provided a roadmap for both Whitehall, the regions of the UK and businesses to follow. At a local level, all the LEPs were charged with producing their own version, which was relevant to match the characteristics and opportunities within their designated areas. Grand plans were proposed and numerous committees were deployed to develop policies around the format of local Industrial Strategies. It would be difficult to count the hours committed to this process. Hidden deep in the budget statement, however, Government had dropped its Industrial Policy commitment and replaced it with an ad hoc approach to supporting economic growth. The replacement Treasury-led document “Build Back Better – Our Plan for Growth” is 112 pages which mainly list existing policies or broad ambitions, such as: infrastructure requirements and the Net Zero carbon agenda. Gone are the fixed term measures or targets, any transparency, or any accountability which the original document contained. In summary, a very high-level aspiration but with little relevance to business, sectors or markets. In effect, therefore, 4 years of work has just gone to waste.

4. Rural

There can be no doubt that rural policy has been difficult to follow over the last few years. The Government has started phasing out Single Farm Payments for agricultural businesses and proposed replacing this with payment for Environmental Services. The repositioning of the rural economy to take account of the Brexit impact is also a critical issue as many of our agricultural manufacturers depend largely upon European imports and exports. The budget was virtually silent on this subject. It seems that the Government is relying on market forces to determine the sources for our food and drink consumption. The consequence of this could be that the UK declines further towards a point where we are no longer self sufficient in food production (currently around 60% and falling). It is also virtually impossible for many of the South West farming businesses, which form the bedrock of the local economy, to write their business plans as the Government has still not published the figures which will define the payment for Environmental Services.

5. Access To Finance

Notwithstanding the Government’s warm words about its ability to monitor and manage our financial services and, in particular, the need to ensure that there is adequate liquidity for business growth and investment, it is clear that currently there are several challenges.

Two examples illustrate the scale of the problem:

  • Mortgage Finance.  This is a market largely dominated by the four major banks.  It is crucial to lubricate the market for starter homes and first-time buyers.  In March 2020, there were no less than 405 mortgage offers available for 95% mortgages.  Just prior to the budget, this had been reduced to 5 – truly a mortgage drought, in fact the worst on record.  The reason for this is principally because the banks have decided that property values would drop as a result of COVID19 and Brexit.  In reality, they have called this wrong and not recognised some of the benefits that have been introduced which are driving a healthy property market.  The budget has tried to address this issue with the Government introducing guarantees for 95% mortgages.  This will potentially be a costly exercise and has diverted much needed Government resources from other important initiatives.  Alternative solutions to this situation should have been found.
  • There is also a time bomb regarding the levels of business debt.  During 2020 nearly 50% of small and medium size businesses sought financial support.  This is three times higher than the levels of help required in 2019.  Current debt levels have now risen to an all-time record, which is 82% higher than the previous year standing at £104 billion.  It is impossible to judge how many of these loans might default.  It is however certain that many businesses will spend years paying off debt rather than investment in staff, equipment and premises.  The scale of this problem is far more urgent than is suggested within the budget response.

5. Freeports

The Freeport debate has, at best, been confusing. The agenda has shifted. The Government originally announced that there would be 10 new Freeports. It then extended this to an estimated 15 new designations. In the event, only 8 were awarded. It is also clear that a whole series of hoops will have to be navigated in order to complete the qualification process. The Government also has made no provision for the trade diversion that this could cause, particularly to areas immediately outside the new free zone borders. This has the ingredients of a policy which has not been fully thought through. Much as it was a huge bonus for Plymouth to receive a designation, it is now crucial that we avoid months of wrangling about the terms of the deal. The Government must establish a delivery taskforce to ensure that this potential valuable initiative can provide the kickstart we all need.

Budgets are milestone events.  This one may prove to be more important than many in the recent past.  We should not, however, be seduced by an agenda which the Government seek to control.

Tim Jones
Chairman, South West Business Council