That is a refrain that will be ringing in Alistair Darling's ears this week as he paces the floors of 11 Downing Street readying one of the most important speeches of his career. The Chancellor's greatest challenge is that as he opens the public purse to assess his options he will find it close to empty. The Government's efforts to spend its way out of recession and the dwindling tax receipts flowing into the Treasury leave the Chancellor with little or no room for flashy, election-winning giveaways to cheer a nation grappling with the worst downturn since the 1980s. For businesses struggling to stay afloat, the pickings could be depressingly measly. At 9.30am on Wednesday morning, three hours before Alistair Darling stands up to deliver his recession Budget, official figures are expected to show Government borrowing touching £95bn at the end of March, the equivalent of 6.5pc of GDP. That is £58bn more than at last year's Budget and £17bn more than the Chancellor predicted as recently as November and will underline the scale of the challenge the Government faces. "This year's deficit will likely be the largest post-war," says David Page, economist at Investec. Borrowing is expected to hit £150bn or 10pc of GDP in 2010. Not only will the Chancellor's borrowing forecasts for 2008/09 and the years to come have to be radically downgraded, so too will his predictions for the health of the economy. The scale of the climbdown will be eye-watering. Mr Darling said in November that the UK economy would shrink by 1pc this year. The sound of opposition jeers will be ringing in his ears as he admits on Wednesday that it is more likely to be 3pc. The ITEM Club predicts the GDP fall will be more like 3.5pc. Shackled by a bulging deficit, with little or no room to announce any major fiscal loosening − tweaks and delays to tax increase proposals being more likely − the Government may have to rely on the drastic action it has already taken, alongside the Bank of England, to pull the country out of recession. Mr Darling's Budget will no doubt list many of those measures. He will cite the Government's £37bn bail-out of the UK banking system, a VAT cut which will cost the Treasury £12.4bn and the acceleration of £2.9pn of capital spending. The list will go on, expounding on the merits of sweeping interest rate cuts which have taken the Bank Rate to an historic low of just 0.5pc and a pledge to pump up to £150bn into the economy by creating and spending new money − an unprecedented move into quantitative easing. UK businesses have greeted many of those moves with enthusiasm but while Mr Darling will be keen to point out those areas of the economy that are undoubtedly showing signs of life − whether the housing market, the manufacturing and services sectors or bank lending − corporate Britain is clamouring for more. The Sunday Telegraph details what lies on the wish list for small business and the property, manufacturing, drinks and retail sectors below. Property • Overhaul Reit regulations • Abolish empty rates tax • Government guarantee for mortgage backed securities • Extend stamp duty holiday and raise £250,000 threshold • Public money to 'gap fund' ready to go sites hit by downturn As Alistair Darling sits down to decide what concessions to grant the property industry, one figure might stick in his mind. A figure that might encourage the Chancellor to believe the worst is over for the sector. The Council of Mortgage Lenders said last week that mortgage approvals rose 4pc in February. Moreover, there was a 7pc increase in loans to first-time buyers. The figures were hardly cause for cheer, but they did give reason for hope. The choice for Mr Darling is whether to leave the industry to build on those developments on its own or to give it a helping hand. The sector has not been shy about listing its demands over the last 18 months. "We need the Government to be brave and implement a range of fiscal measures to nurture the fragile early signs of an upturn," said Stewart Baseley, executive chairman of the Home Builders Federation. At the top of the wish list is reform of the rules governing Real Estate Investment Trusts (Reits), the tax efficient commercial property vehicles. Conceived at the height of the property boom, Reits have proved to be a fair-weather friend, unsuitable in an industry where commercial real estate prices have fallen 40pc and leading property companies have been forced to ask shareholders for new capital. Mr Darling is thought to be willing to change the rules which force landlords to pay out 90pc of rental income in dividends to shareholders and maintain high profits-to-interest ratios. The British Property Federation wants terms loosened, allowing landlords to defer dividend payments or pay them in stock. It also wants the Government to make it simpler for banks to offload foreclosed property assets to Reits While the Chancellor looks set to play ball on Reits − and could even move to develop residential property Reits − calls for reform of empty rates tax are thought likely to fall on deaf ears. Mr Darling is resistant to expanding the existing one-year holiday governing smaller properties. Other measures being considered include the introduction of a tax increment finance scheme which would allow developers to use future tax revenues − such as business rates or council tax − to finance property schemes. Stamp duty is also in the spotlight with the industry calling for reform to help boost the residential property market, while a government guarantee for mortgage backed securities to encourage development could also be on the cards. Manufacturing • Car scrappage scheme • Postpone increases in indirect taxes • Postpone rise in business rates • Temporary increase in investment allowance • Subsidies for short-time workers The worst economic environment for manufacturing in more than 30 years. That is the prognosis offered by EEF, the manufacturers' organisation, ahead of the Budget. While the weakness of the pound has given the sector a lift, industries from automotive manufacturing to printing to oil and gas exploration are crying out for help, with output expected to contract 10pc this year. The much vaunted car scrappage scheme, which will see the Government offer consumers a £2,000 subsidy to trade in old cars for new, should give the automotive industry a much needed boost but other sectors will also be looking for help. Cash flow remains the major concern and the EEF has called on the government to postpone the introduction of indirect taxes including the climate change levy and landfill tax and to postpone a planned 5pc increase in business rates until 2011. EEF chief economist Steve Radley has called for the Government to boost capital expenditure by increasing the annual investment allowance for companies from £50,000 to £250,000 over the next year. With manufacturing unemployment soaring as companies struggle to retain skilled workers there have also been demands for temporary government support targeted at employees on short-time working. With companies cutting working hours to retain staff, industry bodies are calling for the state to provide wage subsidies. Other measures being sought include the temporary extension of a payable tax credit for companies engaged in low-carbon innovation projects and a commitment by the Government to reduce regulation. Drinks • Abolition or suspension of tax accelerator Publicans, wine merchants and other drinks industry insiders will wake up on Wednesday fearing the worst. The sector has had a rough ride from Mr Darling since he became Chancellor and few expect a late Easter present. The latest blow came last November when the Government announced duty increases of 4pc and 8pc on alcohol, designed to offset a temporary reduction in VAT. That followed the decision last March to launch an annual tax accelerator from 2009 that would see duty rise by 2pc over inflation until 2012. The moves sparked outrage and the industry has fought a long, but thus far unsuccessful, battle to have the accelerator scrapped. Research conducted for the Wine and Spirit Trade Association by Oxford Economics suggest the tax rises could lead to 75,000 job losses over the next five years, as well as an 11pc fall in alcohol sales and a 17pc increase in prices. More than 200 MPs have called on the Government to reverse the accelerator but few expect it to make a difference. Despite more than 40 pubs closing every week, Mr Darling's mind appears to be made up. Retail • Rate relief on empty properties • Chop Business Rate Supplement Woolworth. Zavvi. Adams Childrenswear. Rosebys. USC. Whittards of Chelsea. The list of retail casualties from this downturn goes on. Against that backdrop, it should not be hard for the £278bn retail sector to convince the Chancellor that it is hurting. Whether it can wring significant concessions from the Government is a different matter. Stephen Robert son, director-general of the British Retail Consortium (BRC), has called this week's Budget the most important for 10 years and like other sectors the retail industry has been quick to list its demands. The central complaint is that a series of scheduled moves on rates will add 30pc to shopkeepers' annual rates bill. The BRC wants those moves postponed. The industry body has already enjoyed some success, notably on Uniform Business Rates which were due to rise by 5pc this month. After extensive lobbying, the Government agreed to spread that rise over the next three years. The BRC has also called for 50pc rate relief on empty properties and the scaling back or abolition of the Business Rate Supplement, a planned tax that allows local authorities to finance infrastructure projects. A rethink of the rates approach to commercial properties could also be on the cards. The Government is due to revalue commercial properties next April, a move likely to see rents rise. The revaluations are based on the change in rental values between April 2003 and April 2008, a time period which the industry claims will mean many properties are overvalued. Rises in the minimum wage and National Insurance contributions also threaten to wreak havoc on an industry that employs 11pc of the UK workforce and the BRC will be looking for concessions in those areas. Small business • Automatic rate relief • Use of independent corporate mediators to boost bank lending • Introduction of credit insurance state guarantee scheme It is 20 months since "the world changed" but for many small businesses the same problems persist. Former Northern Rock chief executive Adam Applegarth famously labelled August 2007 as the month in which the credit markets dried up but few would then have believed that businesses would still have trouble finding funds today. According to the Federation of Small Businesses (FSB), a recent survey of members showed a third believed their bank was "less helpful" now then when the credit crunch began. The industry body has put the availability of credit and dealing with the threat of soaring unemployment at the heart of its Budget wish list. "The Chancellor is about to announce the most crucial Budget in decades and he has got to get it right," says John Wright, chairman of the FSB. "The Government must resolve the big problems faced by small businesses: the double whammy of irregular cash flow and a lack of finance." The FSB has called on the Government to take a tougher line to promote bank lending but has also proposed its own solution - the introduction of independent corporate mediators to help business customers negotiate and communicate with their banks. The proposal has drawn scepticism amid doubts over how effective or workable it would be. One move likely to be greeted by business will be the introduction of a state guarantee scheme to help insure key supply chains. Many small businesses have been hit as credit insurers have cut cover to guarantee payment in the event of a customer's collapse and trade bodies have lobbied hard for the Government to step in. While some fear the Government's scheme will fall short of the £5bn sought, the initiative looks set to form the centrepiece of moves to help small business.A case of desperate measures
It's simple: "The backdrop to this Budget is one of the bleakest in living memory," says Peter Spencer, chief economic adviser to the Ernst & Young ITEM Club.
Sunday, 19 April 2009
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