It is not an exaggeration to say that this is a serious question being posed by markets and commentators in response to the mini-Budget. The narrative of the mini-Budget that the UK economy needs to improve trend growth rates through improved productivity, investment and innovation is of course agreed by everyone. The debate is simply around whether the measures taken are likely to achieve it. There is for example no evidence that low corporate tax rates encourage investment and the idea is in many ways counter-intuitive since low rates reduce the tax benefit of investment incentives. Equally there is little evidence that economic growth is driven from the top down and that tax cuts to the wealthy drive economic growth. We include in the newsletter various articles about the specific impact of the mini-Budget measures in tax terms. However, the major impact so far has been in its reception by the markets.
Our economic commentary on the budget written in the immediate aftermath ‘Going for growth or going for bust? [click here] suggested that some of its risks were that the markets could react badly, a falling pound could drive inflation higher, and the Bank of England may then have to support sterling by raising interest rates faster and further. At the time of writing, over the last couple of days sterling has fallen to its lowest ever rate against the dollar, close to parity at $1.035, and the Bank of England and Treasury have been trying to reassure the markets. The fears expressed in the article so far look as if they were well founded.
The UK, along with much of the rest of the world, has experienced a series of economic shocks over the last few years: Covid, the energy crisis following the Russian invasion of Ukraine, rising interest rates and global slowdown, to which we can in the UK add the additional impact of Brexit. There will be a few businesses which will automatically benefit from a significant fall in sterling. Foreign currency earnings become more valuable and will contribute more to profit in sterling terms. Your business becomes cheaper in non-sterling terms for a foreign buyer to consider an acquisition. However, most will simply be trying to protect and build their businesses against a backdrop of rising input costs, rising interest rates, difficulty in recruiting and retaining skilled employees, and a softening of demand as consumers have less disposable income. So, what to do?
Well first you need to do everything that you can to improve the resilience of your business. We include a couple of articles on how you can take a systematic approach to this. Second whatever the turbulence created by short to medium term economic shocks, long term trends are still firmly in place. Amongst these are demographic change with an ageing population changing patterns of consumption and driving reduced labour market participation; the changing ways in which businesses are viewed by customers, suppliers and employees, with the need for business to recognise this and create stronger attachments to each group; technological change; and the opportunities arising from the decarbonisation of the economy. We have a series of articles touching on some of these areas from tax and ESG through to approaches to reward and retention of employees.
If you can in tough times make your business more resilient and also focus on the long term then when the cycle turns you will be in the best position to benefit from it.
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