The much anticipated first Johnson/Sunak budget was announced on Wednesday, and as expected it was dominated by the Coronavirus crisis. None-the-less, the budget underlined the new government’s radicalism and intent to break with past orthodoxies. One thing, however, was clear – this was not a budget for the City of London.
Financial Services as an industry barely got a look-in in a budget that was almost entirely focused on COVID-19 fallout, and the government’s regionalist “levelling up” agenda. In spite of this, three announcements stand out.
First, while not technically part of the budget, the Bank of England has announced in tandem an interest rate cut of 0.5pp back to 0.25%. The aim being to restore confidence for both consumers and businesses during the Coronavirus crisis. This is the first out-of-cycle rate cut by the BoE since 2008, and underlines the Bank’s recognition of the potentially sharp impact of Coronavirus. It is expected that this will be a temporary measure to stabilise markets – but the BoE has not formally signalled this.
Second, the government announced a new funding scheme to support SMEs through the Coronavirus crisis. This will take the form of a government backed working capital loan for SMEs – with the government guaranteeing 80% of the value lent. The aim of this being to ensure that as many well-managed SMEs survive the crisis, and ensure that newly lowered interest rates filter through to the SME community.
This programme should significantly alter the risk profile of SME lending, and could potentially kick-start the burgeoning alternative SME finance industry – particularly helpful for those firms with significant Capability & Innovation Fund lending commitments.
Third, and perhaps the most interesting announcement for the FS industry, indicating a significant break from past orthodoxies. The Chancellor announced a formal review into the impact of low interest rates on the economy. Since the 2007/8 financial crisis, a break in the traditional relationship between interest rates and inflation has been observed, leading to a new debate in economics around the impact of persistently low interest rates on economies. A major review into this area could lead the government (which has proven to be unafraid of a degree of economic radicalism) to push for tighter monetary controls.
This debate could lead to a significant upheaval for FS firms, with potential lending margins growing, but a smaller overall lending market.
Watchers hoping for further clarification, or even retraction of IR35 tax changes were disappointed, as no further announcement was made around this controversial change. Concerns that is could be significantly damaging to the UK’s highly-successful IT industry have not (at least yet) led to any changes to rules that are leading many FIs to drastic changes to their policies around contractors.
Beyond the FS industry as a whole, start-ups and SMEs should be relieved by the extensive support being rolled-out to deal with impacts from the Coronavirus crisis. In addition to the above mentioned guaranteed working capital finance, there were announced support through both the tax system, and through some direct payments. Tax support takes the form of a 1-year Business Rates holiday for SMEs – initially for retail, this has been extended to a number of other sectors; additionally SMEs will be able to defer tax payments to help manage cash-flow difficulties during the crisis.
These tax measures are supported by a major initiative where the government will cover the cost of sick pay for employees of SMEs. This measure is likely to have a significant impact, as between illness and quarantine most people are expected to take much more time off work.
The Coronavirus crisis is intensifying, as the government shifts to the “Delay” phase of its crisis plan. It is expecting that more extreme isolation and quarantining measure will be implemented over the coming weeks to slow the spread of the virus. Firms will need to adapt to ways of working that will necessarily include fewer face-to-face meetings, as well as manage what may become skeleton staff.
What impact will the budget have on your business?
How can Axis help you to capitalise on new opportunities in SME lending, and prepare your firm for what may be a radical shift in the economic outlook?