The first cuts are the deepest

Almost a year ago, I wrote in this column of the bitter fallout from Alistair Darling’s then crucial Budget. Now, of course, the political arena is radically different. The new coalition government inherited one unholy mess: the second-largest budget deficit in Europe (at an estimated almost £155bn), soaring unemployment, and gross political, business and economic uncertainty. No mean feat then for new Chancellor George Osborne, when he delivered his “unavoidable” Emergency Budget in June.

It was a decisive and dramatic Budget: overall, Osborne announced cuts to the tune of £6.2bn. In fact, two-thirds of the Budget consisted of savage spending slashes, with the largest of them felling the Department for Business, Innovation and Skills, and the Department for Communities and Local Government.

For the property industry, it’s not as bad as expected. Yes, it will be painful – it will be painful for everyone – but it could have been worse. Government is at least showing signs of listening to the industry a little, if not entirely.

For example, there are sighs of relief over the more modest Capital Gains Tax increase to from 18 percent to 28 percent, rather than the predicted 40 percent. Of course, it won’t be popular among buy-to-let and other big-ticket investors who have previously fuelled housing market growth but let’s face it: rocketing prices were fundamentally unsustainable and must now be tempered. In an ideal world, I would hope that somehow the trickle-down effect of this CGT increase would ultimately help first-time buyers in particular, by controlling house prices – although a rise in rents would be the sting in the tail.

At the other end of the scale, entrepreneurial businesses welcomed the extension from £2m to £5m on the 10 percent relief rate – a gesture that illustrates the coalition’s commitment to supporting business. However, I do have reservations: although it’s claiming to help business, it isn’t helping Joe Bloggs who dabbles a bit in property investment – why penalise lower earners? It undermines what Danny Alexander, the new Treasury chief (who, incidentally, evaded CGT on a taxpayer-funded second home in 2007) said on the BBC: “Those with the broadest shoulders bear the biggest burden.” Am I missing the point here?

No pain, no gain
Retailers, of course, won’t agree that the government is cosying up to business. The VAT rise to 20 percent will deliver a brutal blow to both retailers and consumers – not to mention small building firms and suppliers. Indeed, some have warned that the VAT rise could cause a double-dip recession, with further damage done to the high street and consumer confidence. As property company King Sturge warns, the hike will also increase uncertainty – but I would argue it is a necessary evil. Think of it as short-term pain, long-term gain. The rise alone is the largest revenue haul that should raise £13.5bn a year by 2014-15. The British Retail Consortium accepts the rise is a bitter pill: “We didn’t want a VAT increase. It’ll hit jobs, consumer spending, the pace of recovery and add to inflation but we accept the government has no easy options.”

And, given that it won’t be implemented until next January, retailers at least have some time to prepare (and shoppers have time for a spree). Plus, new homes have mercifully been spared, allaying fears from the housing fraternity. Let’s hope that the rise doesn’t exacerbate the ghost-town effect of boarded-up shop fronts that have become a depressing reminder of our economic plight. Retail landlords beware.

A friend to business?
On the subject of empty properties, one big disappointment of Osborne’s Budget was his failure to review empty rates. This is surprising from a government that has pledged to help business get back on its feet and prosper. That isn’t going happen for many smaller businesses while they’re crippled by this totally unfair tax.

The British Property Federation (BPF), which has run a high-profile campaign on the subject, must be well hacked off. But at least there has been some relief from business rates in the form of the Small Business Rates Relief being temporarily increased for one year from October 2010, and that some backdated business rates will be waived for those eligible for the eight-year schedule of payments scheme.

Indeed, the new government has made more business-friendly measures than not. One of the disappointments of Alistair Darling’s Budget last year was his failure to make REITs more flexible regarding the mandatory distribution requirement. Osborne has thankfully granted the choice to issue stock dividends, which will help promote development, regeneration and employment, according to the BPF. Plus there is some relief for employers from paying National Insurance Contributions, particularly for new businesses set up in ‘targeted’ areas.

Corporation tax will fall from 28 percent to 24 percent from next April, reducing by one percent a year over the ensuing three years. Plus, the small profits corporation tax rate will be reduced to 20 percent from next April. On the face of it, this is a positive move, although – as pointed out by the BPF– could be rendered useless by the capital allowance reduction (to 18 percent) and the fact that REITs will not benefit. Also, tax relief on the first £100,000 spent on most types of equipment will by reduced to £25,000 from April 2012. As a result, there may at least be a surge in spending from businesses stocking up, especially before the VAT rise next January.

Slash and burn
The public sector is getting a right old roasting: there will be a veritable ‘bonfire of quangos’, as the press has vividly described it. This, for many in the industry (and beyond) is crucifying – especially in terms of planning and housing. The scrapping of Regional Development Agencies (RDAs) represents one the most significant of these cuts. Instead, Local Enterprise Partnerships will be set up, intended to encourage greater public-private collaboration. But this is a promising move: RDAs were viewed in the main as being riddled with red tape and ineffectual personnel.

The same cannot be said for other public sector victims. The Homes and Communities Agency has been particularly mangled by the cuts. What an unjustifiable blow to housing recovery to have axed funding for Kickstart, for instance, which was regarded as bureaucratic but effective. As Stewart Baseley, chief executive of the Home Builders Federation, points out: “Cutting Kickstart money, that creates immediate benefits in terms of local jobs and for the wider economy, is a cut on investment, not waste.”

Other casualties include the Building Schools for the Future programme (woeful!), Regional Spatial Strategies and the Planning Delivery Grant. The two latter have plunged planning into chaos, and many sites have been left in limbo. Head of planning at Davies Arnold Cooper, Tim Johnson, explained that government announcements have halted planning decisions at many councils, particularly in the South East. “There is a marked reluctance on the part of local authorities to consider major applications, whether they be commercial or residential. It would seem the confusion is being used as a means of not determining applications.”

At least capital spending was spared, particularly on major infrastructure projects in the regions such as the Tyne & Wear Metro and the redevelopment of Birmingham New Street Station. This is a very welcome attempt at trying to reconcile the imbalance of economic growth between north and south.

I write this as details of the cuts are laid out, like slabs of meat on a butcher’s table. By the time this article goes to press we will know – and most likely be feeling – the full impact of the carnage. However, I would argue that, while residential property has probably faired much worse, commercial property has got off relatively lightly.