Chancellor Announces Economic Emergency
Official forecasts are now predicting the biggest economic decline in 300 years, as the chancellor has announced an “economic emergency”.
The Chancellor of the Exchequer, Rishi Sunak , has said that the “economic emergency” caused by Covid-19 has only just begun. He warned that the virus would mean lasting damage to growth and jobs.
The UK economy is expected to shrink by 11.3% this year, and not return to its pre-Covid size until the end of 2022. Government borrowing will have to rise to its highest outside of wartime to deal with the economic impact.
The Office for Budget Responsibility (OBR) expects the number of unemployed people to increase up to 2.6 million by the middle of next year. This means the unemployment rate will hit 7.5%, its highest level since the financial crisis in 2009.
Amongst other announcements made yesterday, the minimum wage – which has been rebranded as the National Living Wage – will increase by 2.2% – or 19p – to £8.91 an hour, with the rate extended to those aged 23 and over. Other rates were also increased. From April 2021, 16 and 17-year-olds will see their pay go up to £4.62 per hour, from £4.55 today.
The chancellor also announced a £4.3bn package of support to help the jobless get back into work.
What the economic emergency means for your businesses
The economic situation at present is unprecedented in peacetime. The size of the cost of Covid-19 is huge, and the Government will need to find more money from spending cuts and taxes just to balance revenues on a day to day basis.
So businesses can unfortunately expect to see rises in tax announced in the March 2021 budget.
There is already speculation that the government could raise money from changes to Capital Gains Tax, pensions relief or self-employment taxes.
This will however not be sufficient to cover the Covid-19 costs: so we predict there may be some increases to corporation tax, income tax, VAT or national insurance.
The big decision for the government will be to decide when to stop the financial support to the recovering economy – and when to start strengthening public finances by tax rises. The extreme uncertainty underlines how difficult that decision could be.
Help protect your business
There are a number of contingency planning exercises and practices we can recommend, to protect your business in this economic emergency.
Our advice for all businesses right now is to strengthen their cash flow management now, ahead of the end of supports and tax changes.
Take some time to plan ahead, and to look at maximising revenue and minimising or streamlining operating costs. We can provide you with templates and forecasts to achieve this, or we can help you prepare forecasts based hypothetical scenarios. We can also do a “what if” exercise on your business.
Please talk to us about how we can help you make it through the next few months, and how we can help prepare for your businesses’ recovery.