opinion ADDING UP THE SUMS
Budget Day is one of the UK’s traditional financial highlights with the Chancellor’s Red Box featuring in a starring role. Other conventions linked to Budget Day are not always observed. For example, traditionally the Chancellor is the only MP who can drink alcohol in the Chamber of the House of Commons, though only during the Budget speech; the current Chancellor, however, is reportedly a teetotaller. The 2021 Budget Day was the first since the UK formally left the
European Union on 31 December 2020. This, however, was not the main political and economic concern. The Budget was also framed against the economic and financial background of the pandemic. This was to be the source of extensive news management on behalf of the Treasury and Chancellor Rishi Sunak. Pre-Budget briefings insisted that the Chancellor would, effectively, pull no punches and start the process of repairing the public finances. The true picture that emerged with the publication of the Budget
was somewhat different. The Office for Budget Responsibility (OBR), the Government’s financial watchdog, publishes its own forecasts twice a year, including one set that accompanies the Budget. It is evident that a great deal has changed since the OBR published its previous forecasts in November 2020. A major contributor to the change in Sunak’s Budget was the emergence of an increase in Coronavirus infections in December 2020 and January 2021; this led to the introduction of a third lockdown, still in place at the time of writing and which depressed projected economic growth in 2021. However, the latter implied what one commentator described as ‘an even larger bounce-back’ in 2022 with the OBR reckoning that the UK economy will grow by 4 per cent in 2021, down from 5.5 per cent in the OBR’s previous projection, but then by 7.3 per cent in 2022, described as ‘the fastest rise in eight decades’. A key aspect of the Budget’s adjustment was the decision to
extend measures aimed at ‘keeping people solvent’. The Coronavirus Job Retention Scheme, in which the government paid eighty per cent of the wages of furloughed staff, due to end in April has been extended until September. The government has also extended the system of grants and cheap loans to companies which have been ‘rolled forward’, as have the lower levels of Value Added Tax for businesses in the hard-pressed hospitality sector. The Budget has increased spending by close to £35 billion while the tax take for the upcoming financial year has been reduced by £24 billion. Taken together, the publication The Economist reckons that these measures add up as a percentage of Gross Domestic Product (GDP) of around 3 per cent.
PAGE 2 MARCH/APRIL 2021 FEED COMPOUNDER Another tradition of Budget Day is that the Chancellor should
unveil a surprise to the assembled Commons. This year was no exception. It is a well-established fact, according to the Office of National Statistics that, following the 2016 referendum on continued UK membership of the EU, the ensuing uncertainty over the timing of the UK’s exit had a deleterious effect on business investment, which the pandemic has continued and exacerbated. The Chancellor was thus keen to introduce a spur to investment but chose a novel way to secure his objective, the so-called super-deduction. This will allow companies to set 130 per cent of the value of their new investment in plant and equipment against their tax liability, for two years starting on 1 April. A point in passing: it has been emphasized that this measure is only available to companies and it is not available to farm business trading on a non-company basis. It has been made clear that this measure is aimed squarely at
mobilising what have been described as ‘the record high’ cash piles in the company sector, to persuade companies to bring forward or accelerate capital spending. Sources observe that studies by the International Monetary Fund suggest that such incentive schemes often generate ‘a strong response’ from firms and tend to increase the rate of return on investment. These and other measures led the OBR to suggest that the
Output Gap (in other words, the difference between the current levels of Gross Domestic Product and its potential) will close ‘more rapidly’ over the next few years. However, this is not to gainsay the ‘structural damage’ done by the pandemic. For example, the OBR believes that the British economy will be 3 per cent smaller in 2026 than it would have been had the pandemic not intervened. The impact of this statement is emphasised by the fact that this figure is significantly worse than that of the Bank of England’s projection, a modest 1.75 per cent. However, the OBR’s projection derives additional credence from the fact that it is ‘broadly in line’ with other assessments of other economies, including Germany. It is clear that the Chancellor is aiming to balance the budget while
borrowing for long term investment; once the current crisis has past, this will involve a combination of raising taxes and cutting spending. Given the particular circumstances of the feed industry as an integral part of the human food chain, the sector has, perhaps, suffered less than many others. That said, however, the measures introduced by the Chancellor on 3 March can be regarded as beneficial, helping to stabilise a potentially difficult situation. As regards the Chancellor’s sums, they largely – and currently – add up.
Comment section is sponsored by Compound Feed Engineering Ltd
www.cfegroup.com
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