Tax cuts are not enough to help the small businesses facing crippling energy bills
Households facing soaring energy bills have rightly been front and centre of the political conversation. But, as both candidates to become prime minister have pointed out, ultimately our prosperity depends on economic growth. And it’s through prosperity that the government acquires the ability to finance public services and support families in need.
And, with GDP falling in the most recent quarter, the immediate outlook is at best mediocre. UK companies have had to cope with overlapping economic shocks over the past three years. Most have been resilient. But rising energy costs are a particular challenge for small businesses, which account for half of all employment in the UK, and more than a third of total output.
Energy costs are by far the most pressing concern for small businesses – more than tax rises or labour shortages – according to the recent Simply Business SME Insights Report.
It’s not all bleak; despite the general economic pessimism, most businesses remain resilient. While most business owners are pessimistic about general economic prospects, they remain reasonably confident about their own prospects in the face of rising cost pressures. But, as with households, many may simply not yet realise the scale of the cost increases in store. With many fixed-price contracts expiring in October, bills are likely to double, triple or worse.
For some businesses, this will threaten their viability; insolvencies have already risen and are likely to rise further. But that’s not the end of the story. Worryingly, but not surprisingly, the main response of small businesses will be to put up prices, further increasing inflation, and to put the brakes on investment and hiring. These impacts will be less directly visible than the rise in household energy bills, but will be a further drag on demand and growth, and may make it harder to bring down inflation quickly.
Unfortunately, however, politicians don’t seem to be paying much attention to these details. The support packages announced or proposed so far, focused as they are on domestic energy users, will do little for small businesses.
Meanwhile, the centrepiece of the tax proposals put forward by the current favourite, Liz Truss, is the cancellation of Rishi Sunak’s corporation tax increase. But only about a quarter of businesses pay corporation tax; most corporation tax revenues come from a small number of very large companies. So the Truss policy would be targeted almost entirely at larger businesses, doing nothing for companies with profits of less than £50,000 a year.
The new administration will need to think much harder about targeted help for businesses. This could include, as with households, energy bill discounts or rebates to help cushion the blow of rising bills for small and some energy-intensive businesses, while recognising that it will not be either realistic to insulate businesses entirely from the impact of rising prices. It might also involve further support with business rates, which are a much more pressing concern for many small and medium size enterprises than corporation tax, or, as during the pandemic, allowing businesses to improve their cashflows by deferring VAT payments.
None of these options are cost-free – but doing nothing is not an option, and will cost the UK economy more in the long run.