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18 July 2011

Targeted VAT cuts needed to restore growth, says FSB

Reference number: PR/2011/49

FSB News Release

PR 2011 49

Issue date: Monday 18 July 2011

Targeted VAT cuts needed to restore growth, says FSB

Government must rethink its growth strategy as FSB''s quarterly Index shows that business confidence has fallen dramatically.

Government must put targeted and time specific VAT cuts in place to restore growth in key sectors, the Federation of Small Businesses (FSB) said as its latest figures show that business confidence has fallen dramatically.

The FSB is calling on the Government to follow the lead of other EU countries and cut VAT in the construction and tourism sectors to five per cent for a year to help give the economy a real boost. Consumer demand is a large barrier to economic growth so a VAT cut would encourage people to spend in these areas.

FSB figures show that businesses were less confident in the second quarter of 2011 than they were at the start of the year as the FSB ‘Voice of Small Business'' Index fell by 6.4 points in the first quarter from +6.7 to +0.3.

Strikingly, confidence in 13 of the 18 sectors monitored by the Index is not showing signs of business confidence, with five sectors falling from a positive to a negative reading. Most notably, firms that sell or repair motor vehicles are the least confident with an Index score of -45, which is a 65 point drop on the previous quarter.

The FSB is concerned that key sectors for economic growth fell, with confidence among hotels, restaurants and bars falling by nine points from +13 to +4 in the first quarter and construction only rising by one point to +3 in the second quarter.

The Index – which measures the confidence of small businesses across the UK – has been a good predictor for the path of economic growth since it began in 2010. The FSB is extremely worried that the Government''s growth plan is failing and the promises to help small businesses grow have yet to materialise.

By targeting VAT cuts in construction and tourism, the FSB believes that small firms will be able to drive job creation and boost consumer spending – something the Government''s growth plan has so far failed to do.

Evidence from other EU countries shows that any lost revenue to the Exchequer by making VAT cuts will be met by earnings from additional demand, jobs and the wider economic activity.

The Index also worryingly showed that business confidence fell in all but two regions of the UK, with confidence improved in the east of England and in the East Midlands – possibly buoyed by the resurgence in manufacturing in the previous quarter. Business in the North East recorded the largest dip in confidence, with its Index score falling from +2 in Q1, to -30 in Q2 – an enormous fall of 32 points.

It also showed that more firms reported falling revenues in the three months to June than in the first quarter - the biggest decline since Q2 2010, and it showed the second lowest balance since the Index started of firms expecting higher turnover in the coming three months in the second quarter.

John Walker, National Chairman, Federation of Small Businesses, said:

"The economy is still in a fragile state and these figures clearly show that the Government''s growth strategy is just not working. In an economy characterised by high unemployment and muted demand, more needs to be done to encourage businesses to take on staff and grow their business so that the recovery can really get back on track.

"Since the start of 2010, the FSB Index has proved to be a good barometer of the path that economic growth will take, so the news that it has fallen back to almost zero paints a very worrying picture for GDP.  

"We now need the Government''s actions to match its rhetoric, and it must finally deliver on actions in its growth strategy. We must see a cut in VAT to five per cent in the construction and tourism sectors to boost consumer demand. It is tangible measures like this that will actually help small businesses to be able to grow their businesses and grow the economy."