Call for VAT cut on energy by Lancashire business leaders as economy weakens according to official figures

Business leaders in Lancashire have called for a cut in VAT on energy costs for business as the latest official figures show the economy contracting.
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The UK economy shrank for the second month in a row in April in the first back-to-back fall since Covid struck in 2020 as the cost-of-living crisis brought Britain’s pandemic recovery to an abrupt end.

The Office for National Statistics said gross domestic product, a measure of the size of the economy, fell by 0.3 per cent in April, with all three main sectors suffering a fall in output for the first time since January 2021.

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April’s month-on-month drop in GDP was also the biggest contraction since January 2021 and follows a fall of 0.1 per cent in March.

Paul Foster of the Federation of Small BusinessesPaul Foster of the Federation of Small Businesses
Paul Foster of the Federation of Small Businesses

Experts had been expecting growth of 0.1 per cent in April.

The ONS said it marked the first time GDP has fallen for two months in a row since March and April 2020, when the pandemic first hit and sent the economy tumbling.

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But there was some good new on the exports front as UK goods sold abroad accelerated in April 2022 with increases in exports to the EU rising by 8.1 per cent (£1.2bn) and to the rest of the world by 6.5 per cent (£0.9bn).

Workers perform last minute quality testing of the 'fill and finish' stage of the manufacturing process of Covid-19 vaccines.
The pandemic is still affecting the economy with latest figures saying that the ending of the Government’s Covid-19 Test and Trace programme and lower vaccination activity caused a fall in growthWorkers perform last minute quality testing of the 'fill and finish' stage of the manufacturing process of Covid-19 vaccines.
The pandemic is still affecting the economy with latest figures saying that the ending of the Government’s Covid-19 Test and Trace programme and lower vaccination activity caused a fall in growth
Workers perform last minute quality testing of the 'fill and finish' stage of the manufacturing process of Covid-19 vaccines. The pandemic is still affecting the economy with latest figures saying that the ending of the Government’s Covid-19 Test and Trace programme and lower vaccination activity caused a fall in growth
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The economic figures showed output contracted by 0.3 per cent in the main services sector, largely due to the ending of the Government’s Covid-19 Test and Trace programme and lower vaccination activity.

With the Test and Trace and vaccines impact stripped out, GDP would have risen by 0.1 per cent in April, the ONS said, while it added that, in the three months to April, GDP grew by 0.2 per cent.

But there were also declines in the manufacturing and construction sectors, down 1 per cent and 0.4 per cent respectively in April, with manufacturers in particular noting the impact of soaring prices and supply chain woes.

The ONS said it is seeing anecdotal evidence widely across the economy of firms being hit by record fuel and energy prices, in particular the manufacturing sector.

Babs Murphy,Chief executive of the North West Lancs Chamber of CommenceBabs Murphy,Chief executive of the North West Lancs Chamber of Commence
Babs Murphy,Chief executive of the North West Lancs Chamber of Commence
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Babs Murphy from the North and Western Lancashire Chamber of Commerce said that after the raft of issues businesses had to deal with, a reduction in VAT for energy costs would be a significant solution.

She said: “This weakening is the predictable outcome of surging inflation, supply chain disruption and widespread skills shortages.

Businesses from all sectors are facing astonishing rises in raw material costs, soaring energy bills, and wage pressures. The introduction of an increase to employer National Insurance Contributions in April has only further added to firms’ problems.

“This declining output comes off the back of two years of significant damage suffered by small businesses, whose deteriorated cash positions mean that they are in a far worse position to stomach further pressure. The global aspects to all these problems mean they are likely to weigh heavily on the UK’s prospects for growth for the near future.

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“Declining business investment remains a serious cause for concern and urgent Government action is needed to combat this. Cutting VAT on businesses’ energy bills to 5 per cent would ease the squeeze on firms’ cashflow and give them some room for manoeuvre.”

Paul Foster from the Lancashire Federation of Small Businesses said that many small firms were trying to remain positive, but some sectors were being affected by falling confidence.

He said: “Some small businesses in Lancashire report that business is going well and while they aren’t completely untouched by the current cost of doing business crisis they are pushing forward. The majority though are increasingly nervous, especially those who sell to the general public.

"Consumers are starting to cut back on non-essential activity and spending and are increasingly looking for value in their purchases. The cost of fuel is having an impact on people taking daytrips, and the costs of staffing and energy continue to rise.

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"We need to see some support from government quickly. VAT cuts would be a help as would some support for energy costs through the business rates system in the way that households have been supported through the council tax system.”

Chancellor Rishi Sunak said: “Countries around the world are seeing slowing growth, and the UK is not immune from these challenges.

“I want to reassure people, we’re fully focused on growing the economy to address the cost of living in the longer term, while supporting families and businesses with the immediate pressures they’re facing.”

He recently announced a further £21bn support package for households to help tackle the mounting cost-of-living crisis, including a £400 discount on gas and electricity bills for every home, with measures part-funded by a windfall tax on energy firm profits.

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But there are concerns that more measures will be needed, with inflation already running at 9 per cent in the UK and expected to soar past 10 per cent in the autumn as prices rise steadily higher.

Petrol costs have hit new records, with the average cost of filling a typical family car with petrol rising past £100 for the first time last week.

The Bank of England is expected to raise interest rates for the fifth time in a row on Thursday, from 1 per cent to 1.25 per cent, to try to rein in rampant inflation.

Samuel Tombs, of Pantheon Macroeconomics, is forecasting the economy to contract overall between April and June as the cost-of-living crisis hits hard, but still believes the UK will dodge a full-blown recession.

He said: “A recession – two quarters of negative growth – remains unlikely.

“Households’ real disposable incomes should rise in both the third and fourth quarters now that the Chancellor has announced an extra £15bn in grants during these quarters, equal to nearly 2% of their likely income.”

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On the exports uptick, William Bain, Head of Trade Policy at the British Chambers of Commerce, said: “It is heartening to see an increase in the rate of exports to the EU and the rest of the world. Nevertheless, continued progress is needed to meet the Office of Budget Responsibility’s forecast of a net increase in UK exports of 9 per cent across the whole of 2022.

“On exports to the EU, the welcome increase of 8.8 per cent since March is driven mainly by fuels and, to an extent, by machinery and transport equipment, but exports to the EU in chemicals, food and material manufactures remain flat.

“On the import side, there are early signals on the potential for delays, due to COVID outbreaks centred around major ports in China, which may impact the flow of certain goods into the UK.”