Continuing economic uncertainty in 2024: tax changes and a possible general election
It looks like 2024 could be another tough year for the UK economy. Whereas inflation is predicted to fall to 2.5% by the second half of 2024, meaning interest rates would drop from this year’s peak of 5.25% to around 4.5%, overall economic growth is likely to be low. Economists at auditing, tax and consulting company RSM admit that “it would only take the smallest increase in headwinds” to tip the UK into a recession, adding that it will probably be 2025 before the economy gets back to any significant increase in growth. So what is holding the UK economy back? Firstly, the number of people employed in the UK is still below its pre-pandemic level, in contrast to the eurozone, where employment is almost 3% above pre-pandemic levels. Secondly, productivity in the UK grew by just 0.3% year-on-year in Q2 of 2023, compared to growth of 2.2% year-on-year in the US. Coupled with an ongoing labour shortage, the increase in productivity which could be crucial to boosting the economy is unlikely to materialise.
There is also the real possibility of a general election in 2024, since one must be held by January 2025 at the latest. Uncertainty over future government policies is another factor which concerns businesses – while they continue to face the challenge of rising costs and energy bills. Changes in tax reporting, including basis period reform, also have a disproportionate impact on small businesses and sole traders, as do changes in National Insurance contributions.
Businesses face tough choices
According to the Office of National Statistics, the last two quarters of 2023 saw the highest level of company insolvencies since Q2 of 2009. And ONS figures also show that smaller businesses, particularly those in the hospitality and IT sectors, are performing poorly.
These latest figures mean that the UK has one of the weakest growth rates among other G7 advanced economies, with only Germany performing worse. The Ambition Index, a report commissioned by telecomms giant Three, ranks the top five causes of stress for business leaders: 48% cited the cost of living crisis, 28% other financial pressures, 20% lack of government support for SMEs, while changes in the political landscape and pressure to adapt to new ways of working were both mentioned by 19% of respondents to the survey.
In addition, the mental toll on SME leaders was evident, with 52% reporting they were close to burnout and 73% saying that the uncertain environment of the last few years had intensified the risks and pressures of running a small business. 24% felt that the mental pressures on them as a business leader was one of the most challenging aspects of running a small business.
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Weathering the storm: how organisations can respond flexibly to threats and opportunities
Despite the challenges, many small business owners remain optimistic. According to The Ambition Index, 65% of SME leaders now feel more confident in their business, having survived the uncertainty of events such as the COVID-19 pandemic and the ongoing cost of living crisis. 73% have had to adapt their business to survive, and 90% said they have introduced changes to their business in response to the pandemic. With an eye to an upcoming general election, SME owners also have some ideas as to how the government could assist them. A survey carried out in November 2023 by insurance company Simply Business revealed that tax incentives and breaks were favoured by 66% of respondents, while 34% would like to see increased funding for support with energy payments.
Here are a few ways in which SMEs can respond creatively to the threat of recession:
- Focusing on sustainability. A Deloitte study shows that due to the cost of living crisis, consumers are buying more second-hand items, paying more for longer-lasting products, repairing more and using their cars less. This could be a differentiating factor for some small businesses, particularly those in the “pre-loved fashion” or recycling and repair sectors.
- Supporting the next generation to start small businesses. A growing number of young people are showing an interest in entrepreneurship: there were 6,796 companies registered by 16- to 19-year-olds in 2020, compared to just 5,729 in 2019. It’s a good way for an existing family business to diversify, while maintaining the advantages of family ties and existing expertise which can be passed on to younger family members.
- Identifying new areas of demand. One example is the growing need for childminders, brought about by the government’s increased access to free childcare support in England. Simply Business’ new customer data showed that the number of childminders in the UK increased by 70% in 2023 compared to the previous year – suggesting that people are already looking for ways to fill this gap in the market.