The Association for Consultancy and Engineering (ACE) gave a cautious welcome to the Chancellor’s emergency Budget. Today’s announcements included year-on-year reductions in corporation tax rates, an increase in the national insurance threshold for employers, a pledge not to cut overall capital investment levels any further than already planned and specific support for a number of transport projects.

A new regional capital investment fund was also announced, along with measures to exempt start-up businesses outside of London and the south east from national insurance for the first ten employees. There was also a commitment to establish a national green investment bank, similar to a topic that ACE has previously explored.

These measures were tempered by a rise in VAT to 20 per cent from 4 January 2011, along with commitments to reduce overall government spending every year of this parliament.

ACE welcomes the intent to address the Budget deficit and try to ensure that the most vulnerable in society and business are not disproportionately targeted. We also welcome the specific support for transport programmes and the commitment not to cut the overall level of capital investment this year. More than anything, business needs a degree of visibility about investment intentions in order to prepare for the future.

However, the detail of how public spending efficiencies will be achieved is crucial. October’s spending review will highlight where capital spending will be targeted in particular. The recent announcement to put regional transport spending decisions on hold has generated significant uncertainty in the construction industry, which will be looking for clear signals from the Government from this point forward.

The Budget and the spending review present opportunities for the UK to redefine what “best value” means. It would be unwise to abandon projects unnecessarily without a clear focus on the UK’s long term growth prospects, as noted in a recent paper by ACE. ACE has also devised a set of principles as to how best value for the public purse could be assessed.

Some notable announcements are summarised below.

Tax

• Corporation tax headline rate to fall by 1 per cent per year up to 2014.
• National insurance threshold for employers to increase by £21 per week, above indexation.
• The capital gains tax higher rate will rise to 28 per cent immediately, with the entrepreneurs’ 10 per cent rate extended to the first £5 million of lifetime gains.
• Income tax personal allowance to rise by £1,000 from April 2011, except for higher rate tax payers.

Small businesses

• Enterprise Finance Guarantee to be extended.
• Small companies’ corporation tax rate to fall to 20 per cent in 2011.

Regional measures

• A new regional capital fund to be created.
• Start-up businesses outside of London, the south east and eastern England will be exempt from national insurance payments on their first ten employees.
• A white paper on encouraging regional enterprises will be published.

Infrastructure

• No overall cut in capital spending this year.
• Specific support for the following transport enhancement projects:
  - Tyne and Wear Metro
  - Manchester Metrolink
  - Birmingham New Street redevelopment
  - Sheffield area rail improvements
  - Liverpool – Leeds rail improvements
• Fixed telephone line levy to be cancelled.
• Support for private investment in broadband, partly paid for by TV licence under-spend.
• A per-plane duty will be explored.

Other measures

• A bank balance sheet levy will be introduced from January 2011.
• A financial activities tax is being explored.

The Association for Consultancy and Engineering (ACE) notes the Secretary of State for Transport’s announcement on the future of major local and regional transport schemes.

ACE understands that this is a difficult climate for public sector investment, and agrees that any spending decisions should be made only after careful consideration.

ACE has made the case for investment in transport as part of its Budget submissions, which were published today.

The Comprehensive Spending Review will take place in October 2010. This will provide more clarity on the likely shape of public sector spending.

However, we would be concerned if schemes already committed were to be abandoned unnecessarily ahead of the spending review. The impact of cancelling such programmes could potentially be damaging to consultancy and engineering businesses.

ACE will continue to make the case for responsible investment in transport infrastructure where this is affordable, supports economic growth, helps to meet environmental objectives and widens social opportunity.

The 2010 budget confirmed plans set out in 2009 to increase the National Insurance rate. This will mean a one per cent rise in the employee, employer and self-employed rates of National Insurance Contributions starts from April 2011.

The move is part of measures to reduce through taxation, borrowing by £19 billion per year in 2013-14. Other tax rises to support that aim are as follows:

• An additional 50 per cent rate on income tax on earnings over £150,000 (From April 2010).
• Restrictions in the personal allowance of workers earning over £100,000 (From April 2010).
• Restrictions on pensions tax relief for those with a gross income of £130,000. (From April 2011).
• A one penny above inflation rise in per litre fuel duty and real terms increases in alcohol and tobacco duties.

The decision to reduce public borrowing by £19 billion in 2013-14 is part of plans to halve the budget deficit by then. This will also require £57 billion in additional revenues or reduced spending resulting from economic growth and £38 billion in spending cuts.

Implications for ACE member companies

National Insurance rises will be felt by our members, who employ an estimated 100,000 people. It is not certain what effect this rise may have on the future flexibility of the UK’s labour market, which to date has proven to be notably resilient during the recession.

However, ACE has called for sensible measures to address the budget deficit and reduce government debt to reassure the financial markets. ACE has also stressed that it is important to have a consistent flow of investment in infrastructure secure the long term future of the British economy.

If the proposed increase in National Insurance fails to materialise, public expenditure may have to be reduced to compensate, or taxes will have to be raised via other mechanisms e.g. VAT.  Alternative proposals to raising National Insurance, such as making savings through efficiencies need more detail development and discussion on how they would be implemented. For example, the proposed renegotiating of public sector contracts could potentially have serious negative implications for the consultancy and engineering industry.

Efficiencies in public sector spending may fall more heavily on capital budgets, which would probably translate into lower fees and less work for the consultancy and engineering sector generally.

Increasing VAT, on the other hand, may result in a dampening of demand, which could translate to less work for the construction industry overall.

However, what is certain is that financial adjustments will have to be made.  Clarity, certainty and honesty of policy direction will therefore be vital.

It is important for the consultancy and engineering sector, financial markets, consumers and businesses to know how the structural deficit and debt will be addressed, and the subsequent incidence of any expenditure cuts or tax increases. This allows businesses and consumers to adjust their expectations potentially mitigating some of the negative effects.

How would a rise in National Insurance rates affect your business?  Please contact Michael Hall (mhall@acenet.co.uk) if you would like to share your views.

Alistair Darling, the Chancellor, today announced a series of measures in the Budget that impact on the consultancy and engineering sector.

Below are ACE’s initial responses to the announcements.

Addressing the deficit
The Chancellor stated his intention to halve net public sector borrowing over the next four years, mainly through efficiencies.  However, ACE would like to see further details on how this will actually be achieved.  ACE has previously called on the government to set a clear road map for addressing the deficit and giving confidence to markets.

The establishment of a green bank
The Association for Consultancy and Engineering (ACE) has welcomed the Chancellor’s announcement establishing a £2 billion Green Investment Bank (GIB).  The GIB will receive seed money from the asset sell-off programme and then seek private investment.

ACE has made the case for innovative funding methods to address the lack of government money as the next few years see cuts in public expenditure to pay down the deficit.

ACE believes that establishing the GIB is a good start.  It does not in itself address the scale of the challenge, but sets a positive direction of travel in ways to bring funding into projects.  As the government continues its asset sale programme, ACE hopes it will direct some of the money it receives into the GIB.

Focus on SMEs
There was a significant focus on SMEs in today’s Budget.  The measures announced by the Chancellor included an increase of 15% in the number of government contracts that go to small and medium-sized firms and around £47 billion of assured small business loans from RBS and Lloyds.

Other measures to help SMEs saw a 4bn range of support for businesses with help for them to negotiate the bureaucracy involved, a one year business rate cut from October to help 500,000 companies and a credit complaint service to fast track complaints in getting credit from lenders for SMEs.

These headline announcements sound attractive to SMEs but the devil is always in the detail.

The question that the consultancy and engineering sector will be asking is how much impact can these measures have and how quickly they will be delivered.

£270 million university modernisation fund
The Chancellor of the Exchequer used the budget to announce a new £270 million modernisation fund for higher education. This will support 20,000 new places in key courses such as science, technology, engineering and maths courses starting from this September.

ACE looks forward to seeing how this investment is used by universities. It is a positive announcement. However, we must await the detail of how the money is allocated to secure the skills needed to re-shape and green its economy.

ACE welcomes today’s publication of the strategy for the UK’s infrastructure.  The strategy will give Infrastructure UK the management role of a £2bn Green Investment Bank (GIB).  The GIB will focus on low carbon transport and energy, focusing initially on offshore wind.  Infrastructure UK will also develop a National Infrastructure Framework which will identify the critical interdependencies and long term needs of the UK’s vital infrastructure.

There will be an investigation into the cost of civil engineering for major infrastructure projects.  ACE has argued that there are efficiency savings to be made through reform of procurement processes, and ACE will work with the government to ensure that value for money is maximised in all public projects.

There will also be a focus on relevant supply chains for infrastructure sectors and any interventions that might be necessary to ensure delivery.  An action plan will be published by spring 2011.

ACE has argued that there needs to be a coordinated, long term approach to developing the UK’s infrastructure networks.  Today’s announcement could potentially set the UK on a path toward a future of low carbon infrastructure, and ACE will provide what assistance it can to Infrastructure UK.