Budget requires targeted support to drive economic recovery – Resolution Foundation

Targeted support will be needed in the coming Budget to ensure businesses can drive the UK’s economic recovery, according to a report from the Resolution Foundation.

The report has suggested that despite the UK economy experiencing the sharpest downturn on record, the equally huge government response – including access to £87bn of cheap finance, the £59bn Coronavirus Job Retention Scheme and £16bn of direct grants – has helped firms to weather the pandemic far better than many expected.

Insolvencies in 2020 were down by a quarter on 2019 levels, while firms’ cash holdings have increased by £118bn. The think tank suggested this was in “stark contrast” to an average deterioration of around £40bn, in today’s prices, over the past four recessions.

The report added that while much of the extra cash has been raised by taking on additional debt, the UK’s corporate debt-to-GDP ratio is still well below levels seen during the financial crisis.

However, the report also warns that while the corporate sector as a whole is faring better than many would have expected given the scale of the crisis, firms in hard-hit sectors of the economy such as hospitality are experiencing major difficulties. Resolution Foundation has suggested these difficulties risk turning into widespread insolvencies and redundancies unless action is taken.

“Over the past year, businesses have experienced both a huge economic hit and an unprecedented policy response from government,” commented Resolution Foundation economist, Jack Leslie.

“This response has been very successful in preventing firms from going under, and even helped them to boost their cash reserves. But while the path to recovery is now in sight, business still face huge problems ahead.”

The Foundation has called on Rishi Sunak to provide direct grants targeted at firms in the sectors most affected by ongoing restrictions in his upcoming Budget, building on the grants announced at the start of the lockdown in January.

In order to address the problems, the think tank has also suggested the Chancellor should extend the Coronavirus Job Retention Scheme beyond the end of April and set out a phased withdrawal of the scheme, extend business rates relief until the end of June, and delay the start of VAT deferral payments, which are due at the end of March.

“Firms in social sectors like hospitality are running out of cash, and many are likely to shed staff or fold altogether unless further targeted support is provided,” Leslie added.

“In his upcoming Budget, the Chancellor should extend business support to help firms through what is hopefully the last phase of the crisis. But he also needs to look beyond the pandemic, and ensure that some firms’ higher debt levels don’t reinforce Britain’s poor investment record that was holding back growth long before the current crisis began.”

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