UK announces a strong recovery budget
The latest UK budget has seen some startling predictions for the economy which last year shrunk by 10% – the largest fall in over 300 years.
Chancellor Rishi Sunak has outlined a new £65bn support package in his March budget, confirming the decision to extend the furlough scheme until the end of September as well as announcing new loan schemes of up to £10m for businesses. The good news is that all areas of the economy, including all shops, pubs and restaurants, will fully reopen by 21 June at the earliest. But it is not all roses in the garden as it is going to take the UK and us in Malta a long time to recover from this extraordinary economic situation.
The message is of hope that both countries will eventually recover. The British government has cut taxes during the pandemic; reducing the sales tax on food, accommodation and attractions. Compared to Malta, where the corporation tax on business is at 35% (the highest in Europe), we find a low rate of 19% charged in Britain. As was the case in Malta, the UK budget lifted the threshold at which stamp duty is due on home purchases, helping property buyers and the construction sector.
Compared to the cosmetic changes in tax announced in Malta to help businesses survive the pandemic, we read about generous aid announced in the UK budget. The goodies include a new “restart grant scheme”, with hospitality and leisure businesses receiving upwards of £18,000 and non-essential retail receiving up to £6,000 per premises.
There is a recovery loan scheme for businesses of any size to apply for loans of £25,000 to £10m until the end of the year, with the government covering lenders by up to 80%. The cherry on the cake is a lower VAT rate of 5% for hospitality firms.
By comparison in Malta, last October calls for a reduction in VAT rates by the Chamber of Commerce, The Employers Association and the Opposition party were ignored in the 2021 budget. The Chamber for SMEs pleaded for a small trader’s corporation rate in Malta but this was not conceded whereas in the UK, small businesses with profits of £50,000 or less, will be charged at a lower rate.
A novel scheme in the UK is the “pro-business tax regime” being a bid to encourage more businesses to “invest right now”, as part of the scheme encouraging companies to invest and qualify for a super 130% tax deduction. The fly in the ointment is the future increase of corporation tax from 19% to 25% for large companies in 2023.
This is a measure to recoup part of the huge debt accumulated during the pandemic period. In comparison, so far in Malta, the Labour Party in government has not hinted anything about future tax increases to recover the debt mountain needed to finance recovery schemes including a furlough scheme of €800 per employee per month.
Signs of euphoria by Prime Minister Robert Abela, that the worst is over and normality will be achieved this month, gave way to revised downwards predictions by the Central Bank of Malta. It has revised its economic projections for 2022 and 2023, with GDP expecting to recoup towards the end of 2022, conditional on a successful vaccine rollout throughout 2021.
The government debt-to-GDP ratio would rise to 66% by the end of 2022. This downturn is caused due to a decline in net exports, added to a sharp drop in foreign demand, travel restrictions and global supply chain disruptions. Both domestic and external factors are assumed to be severely negative for exports in 2020. In particular, foreign demand is assumed to decline dramatically while the imposed travel ban implies a substantial negative impact on service exports.
Exports to decline by 17.2% in 2020, driven especially by the expected large contraction in travel exports. Domestic demand shrunk due to containment measures and elevated levels of uncertainty. Back to the UK recovery budget, we find an extension of the furlough and self-support schemes to September (Malta’s own furlough scheme so far ends this month). The Chancellor also confirmed that the National Living Wage will rise to £8.91 with effect from next month, while a weekly universal credit uplift of £20 will remain in place until September.
The aim of the generous British furlough scheme is to allow companies to continue employing workers, even when lockdown means there’s nothing for them to do. Four out of 10 employers are using the furlough scheme. It is realistically stated that notwithstanding the euphoria of the successful roll-out of the vaccines programme points to a superlative growth of 7.3% next year.
The budget office released statistics forecasting unemployment to peak at 6.5%, down from the over 11% predicted in 2020. The sad news is that since the start of the pandemic the British economy saw 700,000 people losing their jobs. This loss would have been much higher had the furlough scheme not been announced in March last year with a generous 80% salary contributed by the government for the hours persons can’t work, up to a maximum of £2,500 per month.
Employers will be expected to pay 10% towards the hours their staff do not work in July, increasing to 20% in August and September, as the economy reopens. The scheme will remain unchanged until July when the government will then ask firms to contribute 10% in August and 20% in September. Some debt recovery measures in the budget include the cancellation of planned increases in duties for spirits, wine, cider and beer with all alcohol duties frozen for the second year in a row.
To encourage more cash mobility and transparency the government is promoting contactless payments. These will more than double the current £45 threshold to allow payments of up to £100. Museums and cultural bodies will obtain £90m with a further £18.8m for community cultural projects and £77m will be allocated for “similar initiatives”. Sports will also benefit, as cricket, tennis and horse racing will receive a £300m recovery package, with £25m worth of funding set to support football. Triumphantly, Sunak said that “protecting, creating and supporting” jobs remains his highest priority.
In conclusion, other things remain equal, the British economy is now predicted to return to pre-Covid levels by the middle of 2022 – six months earlier than previously estimated. This is thanks to the smart motto of first jabs and then the jobs.