Many Chancellors had their economic vision dashed by political and economic events. The post-war consensus buckled under the pressure of the 1970s oil shock. Gordon Brown stayed around long enough to watch New Labour defeated by a financial crisis. George Osborne’s smaller-state, tight public spending model couldn’t politically sustain itself past Brexit.
Remarkably, Rishi Sunak may be a Chancellor to buck this trend, as the economic shocks have occurred before he has put his economic vision into practice. This was in stark relief when the Chancellor delivered his agenda-setting Mais Lecture on the day Vladimir Putin invaded Ukraine. Covid-19 and now a cost-of-living crisis, choppy economic waters indeed.
The challenge now is to make sure that his long-term vision for a ‘culture of enterprise’ isn’t swallowed up by the tremendous short-term squeeze: unlike his predecessors, who had their ideas thrown back down to earth, his may never get off the ground.
The national insurance rise will hit businesses too
At the heart of Rishi’s Mais Lecture was a drive to make business more entrepreneurial and innovative, the very things that would make the British economy more resilient. The ‘culture of enterprise’ is not just about creating British silicon valleys, its underlying point is that British business needs to get better at investing in the skills, ideas and physical capital that can drive growth and productivity. In that sense, Rishi’s push is exactly what the British economy needs.
That’s why this Spring Statement will be critical. The dominant narrative now is that the Chancellor will need to address the cost of living, but what is sometimes missed in the commentary is that businesses are teetering too.
Not only are small businesses not subject to the energy price cap, market volatility has made it harder to purchase long-term contracts. The Chancellor may extend the VAT cut for retail and hospitality, but food prices, especially staples such as wheat, have soared, further putting pressure on the sector. A fuel duty cut will help businesses deal with transportation costs, but the national insurance rise will hit businesses too.
This is on top of the debt overhang facing many small and medium-sized enterprises (SMEs) thanks to Covid-19. According to the Bank of England over 25 per cent of SMEs have more debt than cash, and of those a third have debt ten times greater than their cash.
As a result, it may be that much harder to get SMEs to respond to the corporate tax restructuring – encouraging business investment – that the Chancellor proposed in his Mais Lecture. Heavily indebted companies will not be able to make the fiscal commitments encouraged by a more benign investment environment nor deal as effectively with the cashflow squeeze caused by the cost-of-living crisis.
And the problems with SMEs strike at the heart of the wider British economic problem the Chancellor is trying to solve. In Britain, small firms underperform relative to their larger peers, and in fact 90 per cent of the weakest ten per cent of firms are micro businesses. This contributes to Britain’s ‘long tail’ of unproductive firms and the fact that we perform below the G7 average on output per worker.
The current economic environment has revealed these problems in harsh terms. The UK is vulnerable to external energy supply shocks, we are too reliant on low-skilled services, and our labour market is so tight it is likely contributing to inflationary pressure.
The Chancellor is right to say that Government cannot be the solution to these challenges. The ‘culture of enterprise’ is right to centre the private sector and structural weaknesses that need to be corrected. But in order for those weaknesses to be corrected, rather than obliterated, the Government has to think hard about how business will emerge from this cost-of-living crisis.
It shouldn’t stop at cutting fuel duty and extending VAT reductions. The Government should consider reforming the Help to Grow scheme so that more businesses can take part, especially micro-businesses. The Chancellor should back a super-deduction for training, as there is for machinery and other physical investment. The Government should also consider extending the 50 per cent business rate reduction to all eligible small businesses, not just those in retail, hospitality and leisure – this was a fast way to get support to business fast during the pandemic, and a similar mechanism should be considered now. The bottom line is that immediate relief is important to ensure that short-term costs don’t result in long-term difficulties.
There is a real danger that this crisis, far from discovering who is swimming naked when the tide goes out, is simply a hurricane taking everything in its path. It is in assessing this risk that the Chancellor has to strike the right balance, and we should all hope he gets it right.
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