UK Emergency Budget – key points for business. And a question vital to us all

Of course, the headlines are all about the increase in VAT to 20% as of 4/1/2011.  At the same time, there’s quite a lot in the Budget  for businesses including

-    Small Companies Corporation Tax Rate reduced to 20%

-    A partial reversal in the planned increase in Employers’ NI Contributions

-    Entrepreneurs Relief theshhold for Capital Gains Tax increased from £2m to £5m (ie. business owners will pay only 10% CGT on the first £5m of gains from selling their business) – although on the downside the overall rate of CGT for higher rate taxpayers has increased to 28%

-    An exemption for some new businesses from NICs

-    An extension of the Enterprise Finance Guarantee scheme.

All good stuff.

On the other hand, when the VAT increase comes in, it will almost certainly have an immediate negative affect on those businesses which sell directly to consumers.  Over time, it may also stifle demand further down the supply chain as increased costs get passed back or end-consumer demand is reduced.

Then there’s the 25% cut in all government departments’ budgets (apart from health and international development) and a public sector pay freeze for 2 years.  The first of these will almost inevitably mean public sector job losses and far less work for private businesses in supplying the public sector.  And, the second will mean those still employed in the public sector will have less disposable income to spend.  Thus, also reducing demand.

Of course, tax increases and cost cuts alone will not be enough to get the economy back on an even keel – the economy also needs to continue growing.   Now, this Budget will result in a shrinking of the state – no bad thing, many would argue.  Therefore, continuing economic growth has to come from the private sector and, even for the economy just to stand still, the private sector will need to pick up the slack left by this shrinking.   And, everyone agrees, including politicians of every persuasion, that small growing businesses are the engine of that growth.

Now, economics is mostly about confidence and self-fulfilling prophecies: if we all believe that things are going to be OK, then we continue investing and spending, the economy keeps moving and things will be OK; if we all believe that things are going to be bad, we stop investing and spending, the economy stands still or shrinks, and our fears are fulfilled.

So, the BIG question, which will influence the life of everyone in this country over the next few years is: how has this budget influenced the confidence of ambitious owner managers of smaller businesses?   To put it another way, are these incentives to small business owners enough to give us all the confidence to keep on growing our businesses even when aggregate demand is reduced?

How are YOU feeling after yesterday’s budget?