East Anglian businesses are braced for tough times ahead after Rishi Sunak laid out a bleak set of predictions for the UK economy in his pre-Christmas spending review.
With the country still in lockdown, the UK chancellor piled on the misery as he revealed a massive 11.3% contraction in the economy — the biggest fall in 300 years and the second sharpest in Europe.
Across the region, there were fears that some companies would not be able to survive, and that sectors such as hospitality would be particularly badly hit.
MORE — Jobs blow for Suffolk town as silk factory plunges into administrationWith unemployment expected to rise inexorably — peaking at an estimated 2.4m or more than 7% next year, Mr Sunak started with an unvarnished assessment of the nation’s financial position.
“Our health emergency is not yet over and our economic emergency has only just begun,” he said.
But with borrowing at £394bn this year — a fifth of the entire economy — and debt expected to reach 97.5% of gross domestic product in 2025, his only two clear “austerity” moves at this early stage were a public sector pay freeze for those sitting above the median wage of £24k, and cutting overseas aid from 0.7% of GDP to 0.5%.
Instead, infrastructure spend will be pegged at a whopping £100bn — up £27m in real terms compared to last year in a bid to stimulate much-needed growth in the economy. Even so, government statisticians expect the UK economy to be 3% smaller in 2025 than it was.
In Suffolk, there were fears that any “levelling up” infrastructure investment would bypass the region — leaving it to fend for itself as it recovers from the economic crisis unleashed by the coronavirus crisis. Firms also feared the cost of the crisis would fall into companies’ laps.
Matt Moss, managing director of home office manufacturer SMART Garden Rooms, Offices & Studios in Thurston, near Bury St Edmunds, said he was pleased the chancellor’s strategy was “not austerity and instead recovery by investment”.
Infrastructure spend was important, he said, but he was concerned that “the levelling up proposal will be focused in the North and where Suffolk is a safe area with a positive net contribution to the treasury we will be overlooked”.
“We have major infrastructure investment needs with the A14, railway connectivity from Felixstowe and beyond, and still major ‘not spots’ for broadband,” he pointed out.
“With unemployment set to rise as predicted, with the bulk of these likely to be private sector, what is the retraining strategy or investment? The investment in people will be an important one to regrow the economy but this can’t be suffered by the private sector.
“With significant increases proposed with public spending, investment and services, but only one cut in overseas aid, the business community needs to be reassured that this will not be passed to us, which we will not find out until next year. What we need to see a tax and incentive review for entrepreneurs and business owners.”
Paul Simon of Suffolk Chamber of Commerce said Mr Sunak’s figures showed the full impact of Covid-19 on the UK economy.
“However, Suffolk Chamber remains confident that with the right support, businesses in the county and elsewhere will be able to recover in the longer-term.
“But what is needed to restart business investment and employment plans and to boost the necessary confidence in employers long-term planning, is a clear strategy from the government to deliver a quick turnaround and accurate test and trace system and a comprehensive rollout of the available vaccines from early next year onwards.
“The £18bn that the government will be spend on testing, PPE (personal protective equipment) and vaccines is welcome, but the delivery of all of these elements needs to avoid the stop-start stutterings of 2020.”
But Dave Atkinson, regional director for the East of England at Lloyds Bank Commercial Banking, was upbeat about pledges for infrastructure funding.
“The chancellor’s pledge to provide funding to rejuvenate the transport system will be welcomed by many in the region. The plans laid out in the National Infrastructure Strategy will go some way to boost business’ optimism about the coming months and should play an important role in driving the economic recovery post-lockdown.”
The hospitality sector — one of the areas to bear the brunt of lockdown — is one area likely to suffer most if customers have less money in their pockets.
Philip Turner, founder of the Chestnut Group, which owns 12 pubs across Norfolk, Suffolk and Essex, pointed out that hospitality is part of the discretionary spend economy, and was therefore concerned about the dramatic rise in unemployment.
“The acknowledgement in the pain taken by the private sector as a result of Covid-19 is welcomed, although the context of using to justify a pay freeze for non-NHS public sector is not so for those affected – again, risking a realignment of discretionary spend,” he said.
But the government spending response to the coronavirus crisis “has been, and will continue to be a life saver”.
However, the risk was that jobs are being protected for businesses that might fail as a result of the forecast 11.3% contraction in GDP.
“As it stands, there have been no indications from government as to how to further incentivise the private sector to stimulate investment and job creation,” he said.
“The March 2020 change to Entrepreneur’s Relief, and lack of any private investment capital incentives is not creating a fertile environment for private investment and growth – which could sit alongside the huge government infrastructure etc spending initiatives.”
Overall he felt that confidence would take a knock and that consumers’ discretionary spending would reduce.
Some hospitality businesses would go to the wall, he predicted, and the impact of working from home was already leading to behavioural changes.
“Businesses will need to adapt to the new demand dynamic, acknowledging that we will all need to work harder to stand still.”
Andrew Mower, development manager for the Federation for Small Businesses, was disappointed that although the “pro-enterprise” government “said almost nothing about the importance of business and private sector job creation”.
“The Spending Review was a missed opportunity to help small business owners - not least those so far excluded from support measures - and underlines the importance of a pro-business Spring Budget that focuses on growth and recovery,” he said.
“But depending on restrictions over the coming months, we may well need to see significant interventions before then, and particularly to spur business and job creation by the time the furlough scheme is reviewed in January.”
Andrew Diver, head of taxation at Ipswich accountancy firm Beatons Group, said it would take time to work out whether the measures Mr Sunak has put in place will nurture a recovery.
“Meanwhile, the government’s vision for a green economy has been supported with a £126bn investment to reach net zero by 2050 and £92m to plant 30,000 hectares of trees which will support 250,000 jobs.
“The chancellor has also pledged to simplify the planning process to facilitate the building of many more homes to help jobs in construction — but this could put pressure on the greenbelt.”
Notable absentees from the spending review included the state pension triple lock and a no-deal Brexit, he added.
“A no-deal Brexit could have even more adverse effects than the 11% fall in GDP,” he said. “The chancellor also unveiled the increase in the National Living Wage but there is the worry that this could make it more difficult for people to be rehired into the hospitality sector for example, one of the areas hardest hit.”
A “pile of debt” was accumulating, pointing to looming tax rises in the spring, he warned. Capital gains tax and other tax rises were looking likely, he suggested.
Ian Waine, head of corporate and senior partner at Ipswich law firm Prettys, said: “There was not a lot of seasonal cheer in the chancellor’s speech, but there were a few areas to be pleased about. He is not shrinking from continuing to spend money - with borrowing this year at a record high during peacetime of £394bn.
“This is coupled with 19% of GDP against the background of an anticipated annual drop in GDP of 11.5% this year and an expectation that GDP will still be feeling the impact of this year’s downturn in 2025.
“However there is a recognised need to return to a sustainable position in the medium term - but it was unclear as to what measures would be needed in the future to do this.
“For the local economy there was, in common with the rest of the UK, help for the longer term unemployed, some promised public sector pay rises in the NHS but not for other public sector areas and help for the lower paid with the National Living Wage increasing to £8.91 per hour.”
But whether East Anglia will benefit substantially from infrastructure spending will depend on how successfully projects can compete against those from other regions, particularly the north where the government has promised a “levelling up” agenda, he suggested.
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