Business news 25 March 2022
James Salmon, Operations Director.
UK business activity better than expected in March. UK Retail. Government increases support for tech R&D. Record-breaking fall in living standards expected this year. Public left unimpressed by Spring Statement. And more business news.
UK business activity better than expected in March
The latest S&P Global flash UK purchasing manager composite index fell to a two-month low of 59.7 in March from 59.9 in February. This was higher, however, that the 57.8 forecast by economists polled by Reuters. Growth was stronger than expected in the services sector, boosted by the removal of COVID-19 restrictions. But this was offset by a slowdown in manufacturing output, which fell to a five-month low as a result of supply shortages and rising inflationary pressures slowing demand. Chris Williamson, chief business economist at S&P Global, said the reopening of the British economy after pandemic restrictions had helped offset the drag from the conflict in Ukraine, Brexit and rising prices. However, he also warned of “potentially sharply slower growth in the coming months, accompanied by a further acceleration of inflation and a worsening cost of living crisis, which paints an unwelcome picture of ‘stagflation’ for the economy in the months ahead”.
UK Retail
UK Retail Sales fell by 0.3% in February as online sales fell and stormy weather deterred some shoppers. Falls in alcohol and tobacco sales may have been linked to increased confidence in going out to pubs and restaurants, the Office for National Statistics said. Online sales volumes fell by 4.8% over the month following strong growth in December and January. February’s unexpected sales fall followed a 1.9% rise in January.
Government increases support for tech R&D
Rishi Sunak said in his Spring Statement yesterday that the Government would expand R&D tax relief to include areas such as cloud computing and data storage. The Government previously said it wanted investment in R&D to reach 2.4% of GDP by 2027, compared to 1.7% in 2019. Mr Sunak unveiled a package of measures to close the gap and said it would consider making tax incentives more generous, as well as cracking down on fraud. “Over the last 50 years, innovation drove around half the UK’s productivity growth. But since the financial crisis, the rate of increase has slowed more than in other countries,” the Chancellor said, adding that “our lower rate of innovation explains almost all our productivity gap with the United States”. Trade body techUK hailed the move as a “welcome package” for business investment. Its chief executive, Julian David, said: “The proposals unveiled today to further expand R&D tax credits and consult on ways to maintain the tax deduction for capital expenditure have the potential to unlock more investment into UK innovation.”
Record-breaking fall in living standards expected this year
Real household income will fall by 2.2% this year, the largest fall in a single year since records began in 1956, the Office for Budget Responsibility warned yesterday. The OBR said inflation could rise by as much as 8.7% by the end of the year while growth forecasts have been cut for this year from 6% to 3.8%. Using a forecast of future energy prices, its first since the Russian invasion of Ukraine, the OBR now expects the price cap on energy bills to rise by a further £830 in October to hit around £2,800 a year. The fiscal watchdog also pointed out that the pay of Britain’s highest earners has risen dramatically during the pandemic, while pay for those on the lowest incomes has fallen sharply. Average pay for those who earn below the personal allowance has fallen 10.3% over the past two years and pay for basic rate taxpayers has risen by just 4.4%. But pay among higher-rate taxpayers has risen by 21%, and among additional-rate taxpayers has risen by 23.3%.
Public left unimpressed by Spring Statement
The Chancellor’s Spring Statement left the public, think tanks and Rishi Sunak’s political opponents unimpressed in the round. A snap YouGov poll found that 69% of people thought Mr Sunak had not done enough to help people with the increased cost of living. Labour said his tax cuts would not come close to offsetting the sharp fall in living standards, something some Tory MPs privately agree with, according to the FT. Shadow chancellor Rachel Reeves painted Mr Sunak’s decision to lift the national insurance threshold as a partial U-turn: “We said it was the wrong tax. Wrong time. Wrong choice. Today the chancellor all but admitted he got that one wrong,” she said. Paul Johnson, the director of the Institute For Fiscal Studies, said: “If he wants to be remembered as a tax reforming chancellor, so far he is headed in the wrong direction.” Johnson also said that the “big omission” was any support for those on benefits, who he said would see their cost of living rise by around 10% but their benefits increase by just 3.1%. Torsten Bell, chief executive of the Resolution Foundation, said Sunak had spent a “fiscal windfall” on “burnishing his credentials as a tax cutter” rather than on “prioritising help for low and middle income households”. The right-leaning think tank the Centre for Social Justice also highlighted the lack of help for the poorest families, stating: “The reality is this cost of living crisis is just getting started – and today we needed to see a strategy for those struggling the most.” However, some Tory backbenchers welcomed the statement with former Brexit secretary David Davis saying he was glad “Rishi Sunak has finally unveiled a road to cutting tax.”
Inflation hits 30-year high after rising 6.2% in a year
The Office for National Statistics said the consumer price index rose at an annual rate of 6.2% in February, up from 5.5% in January. This means UK inflation has now risen to a 30-year high with the recent surge driven by soaring global prices for energy, petrol, food and durable goods. Grant Fitzner, chief economist at the ONS, said: “Inflation rose steeply in February as prices increased for a wide range of goods and services.” Yael Selfin, economist at KPMG, said the figures confirmed a “worsening squeeze on consumer incomes” that could force the Chancellor to do more to shield those most affected, and add to pressure on the Bank of England to raise interest rates. Jack Leslie, senior economist at the Resolution Foundation, said February’s figures were “a foretaste of the huge income squeeze coming”, which would be a “complete disaster for living standards”.
Despite his tax cuts, Sunak remains a tax-raising Chancellor
Rishi Sunak refused to back down on the national insurance hike in his Spring Statement yesterday, but to ameliorate the pain for lower earners, the Chancellor did increase the threshold at which national insurance is paid. He brought the national insurance threshold in line with the personal allowance for tax, increasing it by £3,000 to £12,570, at a cost of £6bn. The move, effective from July, halves the £12bn he expected to raise from his national insurance rise next month and hands 30m people a £330 tax cut. Mr Sunak also announced a 1% reduction in the 20p basic income tax rate in 2024, costing £5bn and slashed 5p off fuel duty. Despite the efforts to bolster his tax-cutting credentials, the Office for Budget Responsibility said the “net tax cuts announced in this Spring Statement offset around a sixth of the net tax rises introduced by this Chancellor.” Sunak will raise billions from last year’s freeze in income tax thresholds, the national insurance headline increase and a jump in corporation tax next year from 19 to 25%. But Mr Sunak argued the challenging global outlook meant the Government had to take a “responsible and sustainable” approach to its finances.
Business leaders lament Sunak’s missed opportunity
The Chancellor’s Spring Statement was a “missed opportunity” to address the huge cost pressures companies face, business leaders have said. Shevaun Haviland, director-general of the British Chambers of Commerce, said Rishi Sunak could have used his statement to “rebuild and renew the economy and ensure business has the resilience to weather the uncertain and volatile times ahead”. James Brougham, senior economist at Make UK, said businesses would feel unsupported by Sunak’s lack of “investment-spurring policy announcements”. This was echoed by Tony Danker, director-general of the CBI, who said leaving detailed reforms to investment policy until October was too late to get growth going.
FSB welcomes increase in employment allowance
The Federation of Small Businesses has welcomed the Chancellor’s move to increase the employment allowance from £4,000 to £5,000. This relief, which allows eligible businesses to reduce their employer national insurance contributions (NICs) bills each year, results in a tax cut of £425m for around 495,000 firms. Martin McTague, FSB national chair, said: “We originally put forward the allowance as a targeted measure to help small firms, and it has now been expanded three times since its creation. With a cut to fuel duty, these measures will provide crucial breathing space for our embattled small employers.”
Some 30% of workers hit with NICs hike
The Chancellor’s move to equalise the starting national insurance threshold with that of income tax will lift about 2.2m of the lowest earners out of paying NICs altogether. The threshold increase takes effect in July, so initially everyone will pay the 1.25% increase in NICs from April. Some 70% of workers will be no worse off, because the tax break will be worth more to them than the increase in NICs, which has been ring-fenced for health and social care. However, those earning more than £37,000 – an estimated nine million employees – or 30% of workers, will have a higher tax bill. Someone earning £50,000 could end up paying about £100 more this year than last, while a typical higher-rate taxpayer earning £67,000 will be paying £380 more in NICs. An employee earning £100,000 a year currently pays £489.90 a month in NICs. From April this will go up to £580.65 a month, before falling to £548.71 a month in July. Commenting on the changes, Shaun Moore, a tax and financial planning expert at Quilter, said: “The benefits of the National Insurance threshold increase will reduce over time as wage inflation pushes people into paying more.” Elsewhere, Baroness Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “By lifting the threshold, care must be taken that workers earning less than £12,570 per year do not lose access to vital NI credits for state pension.”
Working from home tax break to cost £245m by 2025
An increase in tax relief for home workers introduced at the beginning of the pandemic will cost the Government nearly £250m over five years if it is maintained. This is 25 times more than ministers had forecast. In 2020, the tax-free amount home workers could claim for extra costs including electricity, gas and internet bills was raised from £4 a week to £6. The widespread continuation of remote working, even since pandemic restrictions were lifted, and the increase in the cost of the scheme is likely to lead to calls to cut the benefit.
G20
Joe Biden has called for the expelling of Russia from the G20. He said the decision would be up to the the other members but if Russia stays, then Mr Biden recommended inviting Ukraine as an observer.
BP’s EV Charging
BP has reportedly tabled plans to triple the number of charging ports for electric vehicles, amid calls for greater investment into EV infrastructure. The energy giant is aims to operations around 24,000 charging points in Britain by 2030, under a fresh £1bn investment plan due to be unveiled this week, the Financial Times first reported.
Wickes
Wickes has reported revenue has hit £1.53bn after rising 14 per cent last year. Like-for-like sales were up 12 per cent on 2020 and 18.6 per cent on 2019, as lockdown shoppers turned to DIY projects.
Funeral plan firm collapses
Funeral plan provider Safe Hands has collapsed into administration leaving 46,000 customers uncertain if any pre-bought funerals will be honoured. Restructuring firm FRP said they were not able to provide immediate refunds, but Dignity, one of the UK’s biggest undertakers, has agreed to step in and provide funerals on the company’s behalf for the next two weeks. This will give FRP time to explore a longer-term solution
Britain and Canada begin talks on new trade deal
The UK and Canada have begun negotiations on a multi-billion pound post-Brexit trade deal with International Trade Secretary Anne-Marie Trevelyan declaring that a free trade pact has “huge potential to strengthen and grow trade” between the two countries. Sally Jones, EY Partner in Trade Strategy, said: “Negotiations to upgrade the UK-Canada trade relationship are a welcome step which will enhance the deep and long-standing ties between the UK and Canadian business communities. This is a significant opportunity to agree new and ambitious trade provisions which will benefit the UK services sector.”
City remains Europe’s leading finance hub
The City of London has retained its crown as Europe’s dominant financial centre, coming second only to New York in the latest global financial centres index published by think tank Z/Yen Group. The City comfortably beat rival European centres including Paris, Frankfurt and Amsterdam, which respectively came 11th, 16th and 19th. However, the gap between London and New York has grown since September while the capital’s fintech offering has fallen behind Beijing and San Francisco. The report from Z/Yen said: “London’s regulatory environment, anti-corruption regime and rule of law is reasonably good. However, the financial services industry and its regulation needs to move to focus more on the perspectives of individual consumers and beneficial owners of money/assets than on the providers of services.”
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