Retailers in the North this weekend are counting the cost of last week’s emergency budget in Britain.
Chancellor of the Exchequer George Osborne’s first budget included a package of spending and welfare cuts and tax increases aimed at saving an estimated £40 billion.
In an effort to tackle Britain’s spiralling deficit, Osborne unveiled plans to raise capital gains tax, introduce a levy on banks, reform welfare payments and freeze public sector pay for two years – but it is his decision to raise Vat from 17.5 per cent to 20 per cent from January that has caused most consternation among business leaders in the North.
‘‘The chancellor has described this budget as ‘tough but fair’, but how exactly is the Vat hike fair in any way for small businesses and retailers?” asked Glyn Roberts, chief executive of the Northern Ireland Independent Retail Trade Association.
Figures released last week showed that the North was the only region in the UK to record a monthly rise in the number of people claiming jobless benefits. Roberts is concerned that the increase in Vat, which the British treasury expects will raise £13 billion across Britain in extra taxation, could further destabilise the North’s already slow recovery.
‘‘The Vat increase is a regressive move which will do absolutely nothing to restore consumer confidence and increase spending,” Roberts said.
‘‘This is a major mistake, it is bad news for small businesses and it will cost Northern Ireland’s consumers greatly.”
Roberts estimates that average small retailers will have to spend around £2,000 re-pricing their stock to reflect the new Vat rate. ‘‘This is a further expense for retailers at a time when many are struggling to survive,” said Roberts.
Hugo Thomas, of Hugo Thomas menswear on Belfast’s affluent Lisburn Road, agreed. ‘‘Suppliers and stockists will all have to change their pricing structure, which is a major hassle, on top of the loss in margins,” he said.
The level of Vat in Britain was reduced from 17.5 p er cent to 15 p er cent in November 2008 in an effort to encourage spending at the start of the downturn, but Thomas feels the initial measure did little to help smaller businesses.
‘‘When the 2.5 per cent Vat decrease happened, it didn’t make a lot of difference. But I do think this 2.5 per cent increase will make a significant difference to small traders.
I think, psychologically, it could be a bigger barrier for customers. It’s something we definitely don’t need right now,” said Thomas.
With consumer confidence low and the North’s heavily public sectorreliant economy hit by the new pay freezes, Thomas believes that retailers will have to bear the cost of the Vat increase, rather than passing it on to shoppers.
‘‘People go to small, independent retailers looking for value, so passing the increase on to customers just isn’t an option. It’s going to affect us directly at the tills,” he said.
It has been a turbulent 18 months for many smaller retailers in the North, and Thomas envisages a difficult year ahead: ‘‘We are treading water probably for the next year. I don’t think anybody is making a profit; we’re all just hanging in and waiting for the upturn.”
James Rider, manager of HMV in Donegall Arcade in Belfast city centre believes larger retailers are better placed to weather the storm caused by Vat increases.
‘‘Unlike smaller retailers, who would have just cut all prices by 2.5 per cent when Vat was decreased, we made significant reductions on big-ticket items, rather than cutting prices across the board.
Now when the Vat increases come into force, we can make some savings on cost and the rest on big-ticket items,” he said.
Rider also expects to see a significant amount of big-ticket sales in the months before the Vat increase comes into force, in January. ‘‘For smaller items, such as CDs, a 2.5 per cent saving on £20 is not going to make much of a difference, but it you’re talking about a new games console or an MP3 player, it can. I think we will see a larger that average trade in those kind of lines before Christmas,” said Rider.
Esmond Birnie, chief economist with PricewaterhouseCoopers, Northern Ireland, thinks that the Vat increase may even help the North’s economic recovery, at least in the short term.
‘‘The move could help the recovery this year with people doing a lot of big-ticket shopping this year to avoid being hit with an extra 2.5 per cent in January,’ he said.
Birnie estimates that the Stormont executive could be faced with further budget cuts in the region of £300 million for the next fiscal year, on top of the £490 million in spending cuts that have already been announced since February.
But he believes that the latest round of cuts could have unexpected political consequences for the North’s devolved assembly.
‘‘This is an opportunity for the executive in Stormont to say ‘there’s a climate in London that is open to increased devolution of economic policy so let’s go for it’.
‘‘Either we decide to stay the way we are and remain a permanently depressed region reliant on Westminster or we begin to take charge of our own economy. Only time will tell what choice we make.”
Appeared in The Sunday Business Post on June 27