Dragon’s Den (and CEO of Hamilton Bradshaw),
James Caan, gives his personal perspective on George Osborne’s austere budget.

This is the most aggressive budget I have witnessed
in my lifetime. At £155billion, or 11 percent of
GDP the UK
faces the highest budget deficit of the G20 leading economies. It is essential
that the deficit is tackled as quickly as possible. The UK has already borrowed
over £925bn, or equivalent to almost 65 percent of GDP, and this will grow over
the next four years despite the government’s attempt to erode the structural
deficit.  The annual interest repayment
on this debt is currently £42bn per annum, which is equivalent to the entire
education budget. With the potentiality for this to reach £70bn quickly, this
clearly needs to be tackled, and we can’t risk letting it swell and cripple
future public finances.

It is a double hit – not only will the net debt increase faster if we do not
tackle the deficit now, the interest payments will actually increase as bond
markets reassess UK plc risk. Even marginal changes in this assessment will
have a huge monetary impact on the public sector finances, and so it is
essential that we take the tough and responsible decisions now.

The challenge is huge and
complex, but necessary. Fiscal tightening itself is only one aspect of the
challenge, and just as essential is the need to rebalance the economy towards
the private sector, in order to give it a sustainable footing for growth.
Outlining a clear plan for tax and spending changes was essential, and as part
of this, a clear message to business and the private sector was necessary to
provide the positive incentives and confidence that is so necessary at this
point in time. Moreover, the only sustainable way to achieve growth is to
promote private sector growth and private sector jobs.

As an entrepreneur, with
much experience of running my own businesses through past recessions, I believe
that the Coalition government needed to act responsibly, in an objective
fashion, and make tough decisions that were necessary. In the corporate world,
for a business experiencing overwhelming and increasing debt, and declining
revenues it would be entirely normal to respond by cutting costs and spending.
The general consensus is that this is necessary for the UK plc, but the
sticking point is about how, and at what speed.

Whilst we are not Greece,
its example exists as a warning to us of the consequences of delaying action
until tomorrow, which could have been taken today. Delaying the necessary and
inevitable action has never been the right thing to do, especially when we are
facing so many uncertainties, such as a weak Eurozone, and a threatening second
financial shock emanating from this region. I believe that the risks in
delaying action are greater than the risks of doing as much as possible now.
It’s a bit like managing your household expenditure; when you are living beyond
your means it becomes necessary at some point to reign in your spending, and to
take the necessary action as soon as possible.

The challenge is real and
the simple fact is that there isn’t enough money to continue with the levels of
spending that we have been used to over the past decade. Every aspect of
government activity will be reviewed, and the effects of the budget cuts will
have an impact on the lives of everyone in the county. To save off a potential
double dip-recession, however, the Budget needed to set out a clear message to
business that the tax changes will be supportive of entrepreneurism and
investment, then the private sector will bounce back and drive the recovery.

The Verdict

The largest component of the
fiscal tightening will come from spending cuts, with departments expected to
lose 25 percent+ of their budgets by 2014/15. The consensus amongst all
governments now is that bureaucracy has become oversized, expensive and
inefficient. Cutting departmental spending by an average of 20 percent was
necessary, and it will force them to operate at acceptable efficiency levels.
This is one aspect of our need to rebalance the economy. It needed to be done
in such a way that adverse effects will be kept to a minimum, and this is why
the government has chosen to freeze pay and look at the unpopular but necessary
pension contributions – as a means to minimize immediate direct job losses.

In terms of unemployment and
jobs, the austerity measures in the budget are likely to result in higher
short-term unemployment. However, if the government can instill confidence in
business and encourage investment in the private sector, then the jobs market
will begin to pick up over the medium-term, as the private sector recovers more
strongly. It is necessary that this happens, and in the medium- to long-term,
facilitating a vibrant private sector is the only way to do this. Investment in
new technologies and the UK’s engineering future is also one aspect that will
help this. One additional policy to counter this problem is the expected
Conservative policy of exempting new businesses from Employers’ National
Insurance on the first ten employees they hire in the first year, which will
apply to most non-London regions. Policies like this, and the resistance of NIC
increases for employers are consistent with the Coalition’s emphasis on
creating private sector jobs, as it will reduce overheads and not
disincentivise hiring.

In terms of tax rises, the
government cannot leave anyone out of the net, and whilst many decisions are
tough, they are necessary evils given the scope of the fiscal challenge, and the
need to be ‘fair’ and make the budget fly.

Take CGT for example;
clearly, this is a bold decision by the Government to raise it to 28 percent
because it will affect both the more affluent and the business community, and
essentially an increase on those who are needed to invest in the private
sector, create jobs, and who will ultimately drive the recovery. Nevertheless,
when you are staring down the barrel of a £155billion deficit and a swelling
debt burden, tough decisions need to be made. In previous recessions, I have
also faced similar dilemmas where sensitive and unpopular decisions that affect
the people you rely on have had to be made. I always remember to ask myself
what the consequences of not acting are.

Looking at VAT, it is
historically a low hanging fruit, and it no surprise to see it increased to 20
percent from next January, which Osborne expects to raise approximately
£13billion per annum by 2014/15. However, at 17.5 percent it is already at the
top-end of UK acceptability. Moreover, from a business perspective, it hits
SME’s much harder, as they do not have the reserves to absorb the practical and
admin costs of implementing pricing and accounting changes. Changes last year
are believed on average to have cost £1500 per business to implement. The
Government need to think hard about the impact this is going to have on SME’s.
SME’s employ 59 percent of the private sector workforce in the UK, with many
facing low profits, this increase could endanger many businesses that are
struggling to survive.

The promise to suppress the
NIC increase on employers (the so-called jobs tax), by raising the threshold
for employers, is part of the overall message that the Coalition is attempting
to make, that it is serious about creating a business friendly environment in
the UK. So to, is the decision to reduce the overall level of corporation tax
by 1 percent per year from 28 percent to 24 percent – part of the message that
‘Britain
is open for business.’ Cutting the SME level from 22 to 20 percent will be help
to address the above problem. Moreover, in addition to the extension of the
enterprise credit guarantee scheme, the reduction in corporation tax will be a
huge relief to companies with poor cashflow. The extension of the £10,100 CGT
allowance for the first £2million to £5million of lifetime earnings is a major
incentive to entrepreneurs to create value in their businesses, and is a clear
message to entrepreneurs that their efforts are valued.

Overall, from a business
operational perspective, the tax policies are quite well balanced, and send the
correct message that the Coalition is doing all it can to make running a
business in the UK as competitive as possible. Further incentives of keeping
the cost of employing people low are also promising.

The fiscal tightening will
undoubtedly affect both short-term economic growth and job prospects, but I
believe that configured in the way the budget has set out, the private sector
is being given the best chance to lead the recovery and put the economy on a
sound footing looking forward.

My Advice to Business

My message to entrepreneurs
has repeatedly been, when the going gets tough, and it will, then the tough
need to get tougher. Businesses need to look at their own operations, and
reflect deeply on their own cost base, profit margins, and the various
activities of the business. They need to look at their budgets over the next 12
months and make the necessary plans and provisions to absorb the impact that
the budget will have on them and more importantly, make the necessary changes
in their plans.

Essentially, we, like the
public sector, also need to do better, and deliver more for less. Two practical
examples of this are that any business that we are doing which is at a low
margin and therefore inefficiently wastes effort for little reward, needs to be
cut; there will simply be no room for complacency. Secondly, as the public
sector is taking a pay freeze, both in direct terms and increased pension
contributions, we as business leaders need to consider implementing the same
measures with our employees if our budgets are tight. Nobody wants to make
people redundant, and so if ways can be found to negotiate with staff, and
implement similar freezing measures, then this must be considered.

My point is that there is no
point in business leaders bemoaning the cuts, and every need for them to take
the essential actions to remain viable business models – the onus is on us. As
an entrepreneur, you need to be objective about the environment that you find
yourself in, and adjust to it.  We also
need to reconsider our pricing, and look at what aspects can be passed on. We
also need to look at the changing costs of doing business and focus on the
areas that make positive contributions, and find ways to create value in
response to changing demands.

This advice is not complex;
it is about critical and reflective attitude change, and the most successful
will yet many business leaders will be the ones who make the changes. It is
this positive business attitude that we need to adopt, if business is going to
drive UK growth. Businesses that do not show such resolve will find the coming
years extremely, perhaps existentially difficult. I am confident however, that
the majority of UK businesses will make such changes, and many have already
shown exceptional introspect.