Channel reacts to Budget and interest rates cut
The Bank of England reduced interest rates by 50 basis points and the new chancellor laid out his war plan to help SMBs struggling against coronavirus in the 2020 Budget
The Bank of England (BoE) and the UK government have set out their war plan to cushion the financial blow many businesses will feel as the COVID-19 virus continues to spread.
The BoE has slashed interest rates by 50 basis points - form 0.70 per cent to 0.25 per cent - to help offset damage to the economy caused by the outbreak.
The decision was made in order to "support business and consumer confidence" and improve cashflow for businesses and households as the economic fallout of the contagious illness remains to be seen.
Neil Murphy, group MD of Bytes Technology, told CRN he agreed that the move will bolster confidence among those businesses concerned about disruption to their supply chains.
"The interest rate reduction will give a shot in the arm to all those worried about the supply chain breaking down and how any degradation to its integrity will affect actual profits and cashflow of their businesses," he stated.
"It's really important for the BoE and the chancellor to boost business confidence right now. If the chancellor loosens his fiscal framework and creates massive new infrastructure projects by borrowing more, that too will generate confidence and positivity just when we need it. It's great to see businesses and politicians pulling together and finding solutions at this difficult time."
Dave Stevinson, MD of software distie QBS, said he was anticipating such a decision from the banking authority and called it a "positive" move.
"My big concern is that they've nowhere to go after this - they've only got 0.25 per cent to play with," he said.
I thought they might go with a [reduction of] 0.25 per cent initially and keep the rest in their armoury in case they needed to use it."
He added that although QBS delivers the majority of its products electronically, it has still received notices of delays around consultancy and professional services. He noted that those in the channel that specialise in hardware will still feel the pressure, even with this help from the BoE.
"The cost of capital will become much cheaper for those that are borrowing money," he stated.
"However, those in a cash-rich situation without borrowings are going to get even less return on their money.
"But it doesn't solve the fundamental problem: our supply chains are going to be creaking. If you're selling hardware, people are going to struggle. All I can say at this stage is that the magnitude of the economic shock remains uncertain and the short to medium-term disruption to the supply chain is very real."
In addition to reducing banking interest rates, the BoE also announced a new Term Funding Scheme which will give SMBs additional incentives, as well as assisting banks and building societies with additional funding to increase their lending to SMBs.
Artur Baluszynski, head of research at investment management firm Henderson Rowe, said these measures are about all the BoE can do to lessen the economic impact of the coronavirus.
"There is very little the BoE can do to repair the damage done to the economy by COVID-19, so they are doing the only thing they can: starting to ease and lubricate the financial system," he said.
"The BoE will try to throw everything they have at this crisis while waiting for the government to start some sort of fiscal stimulus."
Rupert Thompson, chief investment officer at investment solutions firm Kingswood , warned that the interest reductions might not be effective in countering the potential disruption caused by the virus.
"The rate cut itself is probably of most importance symbolically as it is unlikely to be particularly effective in mitigating the looming disruption from the coronavirus," he stated.
"However, it is being accompanied by measures to relax capital rules for the banks so they can provide more support for struggling businesses.
"Despite these various moves by the authorities, the UK economy - like many other economies around the world - will struggle to escape a short-lived recession over the coming months."
Budget takeaways
New chancellor Rishi Sunak pledged £30bn of extra spending to protect the economy from the coronavirus, in addition to the measures taken by the BoE.
The extra spending includes an allocation of £2bn to refund companies with fewer than 250 staff to cover sick pay for up to two weeks. Small business will also be able to access "business disruption" loans of up to £1.2m.
Kingswood's Thompson warned that the combined steps taken by the banking authority and the government might not prove to be enough to counter the full financial fallout from the coronavirus.
"Together, these various fiscal and monetary measures amount to a significant stimulus," he said.
"Even so, it is far from clear if they will be sufficient to prevent the economy dipping into recession over the coming months - not least because today's numbers showed GDP growth grinding to a halt at the start of the year even before the threat from the coronavirus had become apparent."
Sunak also committed £5bn to make "gigabit-capable" broadband accessible in the hardest-to-reach areas of the country by 2025.
Maziar Nekovee, Professor of telecoms and mobile technologies at the University of Sussex, said getting the four big operators to work together as part of the Shared Rural Network is "sensible", but that it should have pushed more to make 5G accessible to the whole country.
"It is disappointing that instead of pushing operators to take advantage of this arrangement to bring 5G to the whole country, the government is focusing on 4G coverage," he said.
"The danger is that we will see a new digital divide emerging, with cities benefiting from 5G's higher speeds and other benefits that 5G offers, while rural areas are stuck with 4G, with no incentive from operators to upgrade to 5G and also little room for regional companies to fill in the gap.
"The massive investment to upgrade to ultrafast and fibre broadband is also laudable but as the UK is currently among the lowest fibre penetration in Europe, this money will only help us to catch up with the rest of Europe."
The digital tax
In the last Budget in 2018, former chancellor Phillip Hammond introduced the Digital Services Tax, which would place a two per cent levy on the revenues of tech titans such as Amazon, Facebook and Google. It was mooted to come into effect next month. Sunak maintained that it would be introduced.
Kelvin Kirby, chief exec at Microsoft partner Technology Associates, was unconcerned about the effect such a tax would have on partners and that any knock-on cost increase would be "negligible".
"I think for the majority of IT partners in the UK wouldn't be affected because the threshold at which you have to pay the digital tax - at least in theory - is considerably higher than most businesses' turnovers anyway," he elaborated.
"It would really only affect the £500 million-plus businesses, such as Microsoft, Amazon, Google, etc. Microsoft is probably the best of the bunch in terms of meeting their commitments from a taxation perspective, but there's no doubt that there will be an impact.
"I think all that really means is that we'll see the cost of cloud services - for example, the monthly cost of Office 365 or Azure - go up very slightly.
"That means a slight increase on the cost, and the companies will cover it through that slight increase; they have such a massive footprint globally that it's almost going to be a drop in the ocean.
"We might have expected costs to come down because of economies of scale - and I think we will see that happen in the long term - but we might get a slight blip. I imagine that would be the most logical approach to deal with it."
‘Disappointed'
Prior to details of the Budget being announced, QBS' Stevinson said he had hoped the Entrepreneur's Relief tax break would remain fixed, but the new chancellor dashed those hopes.
The incentive allows entrepreneurs to pay 10 per cent less in capital gains tax when they sell; the Relief was capped at £10m for one person, but Sunak's new budget has slashed that to £1m.
"I'm most disappointed with the changes to Entrepreneur's Relief - I always admired our government for encouraging entrepreneurship in the UK and consider that 'the best tax break in the UK' has just been ruined," he said.