Spending Review 2020: implications for businesses

In his Spending Review on 25 November Chancellor Rishi Sunak said the “economic emergency” caused by Covid-19 has only just begun, as he warned the virus would mean lasting damage to growth and jobs.

Economic consequences

Official forecasts now predict the biggest economic decline in 300 years.

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 rise to its highest outside of wartime to deal with the economic impact.

The Office for Budgetary 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 does this mean for businesses?

Clearly the situation is unprecedented in peace time. 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. Businesses could therefore expect to see tax rises 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. However this will not be sufficient to cover the Covid-19 costs so there may also be some corporation tax, income tax, VAT or national insurance increases.

The big decision for the government will be to decide when to stop the 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.

Planning ahead

Businesses should strengthen their cash flow management now ahead of the end of supports and tax changes.

Take some time to plan ahead to look at maximising revenue and minimising or streamlining operating costs. We can provide you with templates and forecasts to do this or we can help you prepare accurate forecasts based on a number of scenarios and do a “what if” exercise on your business.

Christmas arrangements

A joint statement on UK-wide Christmas arrangements from the UK Government and Devolved Administrations has been published outlining UK wide arrangements for Christmas.

They have agreed that:

  • Travel restrictions across the four administrations and between tiers will be lifted to provide a window for households to come together between the 23rd and 27th of December.
  • Up to three households can form an exclusive ‘Christmas bubble’ to meet at home during this period. When a bubble is formed it is fixed and must not be changed or extended further at any point.
  • Each Christmas bubble can meet at home, at a place of worship or an outdoor public place. However existing, more restrictive rules on hospitality and meeting in other venues will be maintained throughout this period.

Please contact us to see how we can help you make it through the next few months and prepare for recovery.