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The transcript for ICAEW Insights podcast episode 30: 'Recession? What recession? Time for business to stop worrying and start investing'.

Iain Wright: Hello and welcome to a special ICAEW Insights In Focus podcast, in which we’ve got leading economists taking the pulse of the UK economy and providing perceptive opinions as to what this will mean for businesses large and small over the coming weeks and months. Over the last 15 years or so, and indeed, in the last few short years, we’ve had several globally significant historic events, which will have an impact upon society and economies for years to come. We’ve had a deep recession caused by the financial crash in 2008. We’ve had a global health and economic crisis caused by COVID-19. We’re experiencing a geopolitical and security crisis arising from Russia’s invasion of Ukraine. And as a direct result of that tragedy, we’re seeing a global energy crisis, fueling – that’s probably the wrong choice of word – inflationary rates not seen for over a generation.

And that’s not even taking into account other longer-term trends, such as the impact of technology on business models, the transition to a net-zero economy, an ageing population throughout much of the world’s biggest economies, including our own, and repercussions arising from the UK’s decision to leave the European Union.

So where does all this leave the prospects for the UK economy? And businesses that will be shaping those prospects? Can we be positive? We’re still the world’s fifth biggest economy. We’ve got record numbers of people in full-time employment, we attract more capital than France and Germany combined into start-ups in sectors of the future like fintech. And we’ve got world-beating sectors like aerospace, engine and wing manufacture, pharmaceuticals, higher education, and indeed professional and business services.

We’re recording this on the day that GDP figures for May 2022 were published, and they show a surprising growth in the economy. So, does this indicate the strength and resilience of the UK economy? Or should we be pessimistic? Inflation is eroding spending power at the highest rate since 1982; productivity, which is the real thing that produces living standard increases, flatlining for 15 years; and business investment, which propels future economic growth, falling by 9% since the pandemic. Are we in structural economic decline?

I’m Iain Wright, Managing Director of Reputation and Influence here at ICAEW. To make sense of all of this, I’m delighted to be joined by two leading economists: Kitty Ussher, Chief Economist at the Institute of Directors, and formerly a Member of Parliament, and indeed Cities Minister of the Treasury, Suren Thiru, who is our newly arrived Director of Economies at ICAEW, having recently joined from the British Chambers of Commerce, where he was Head of Economics. Welcome both. It’s great to have you here.

So, Kitty, I was sort of giving that sense of should we be optimistic, should we be pessimistic? Where are you on this?

Kitty Ussher: Well, businesses are feeling pessimistic, and I noticed that you said it was surprising that GDP showed growth in May compared to April. I think that we are being too pessimistic at the moment. I think there are many reasons to feel more confident than businesses, and indeed consumers, are currently feeling. Here are a few reasons. The economy has not been shut down by a pandemic, it has been reopened. We are able to go about our business. All else being equal, the economy does normally grow at a rate of like 1.5 or 2% a year. And whilst there are some big problems and issues, at the moment those are mainly on the supply side, so, how difficult it is to get input, obviously the rising commodity prices, particularly in energy. And so, businesses listening to this know that there are problems fulfilling orders, but on the whole, although it varies a bit sector to sector, on the whole order books, pipelines, the volume of activity is pretty robust. So, whilst, we can never predict the future with certainty, although I know it’s my job to do so, I would say that it’s the fear of fear itself that is driving some of the issues at the moment rather than what we’re actually seeing in reality.

IW: And Suren, where are you on this optimistic/pessimistic spectrum? And we at ICAEW have got the business confidence monitoring. Is that telling you in terms of where we should be in terms of the future of the economy?

Suren Thiru: Yeah, I mean, the business confidence monitoring is showing, I guess, two big stories. The first one is, as Kitty says, activity is still holding up pretty well. We’re seeing domestic sales hold up pretty well. But on the flip side, we are seeing businesses’ confidence starting to slide. And that’s due to a number of headlines, not least high inflation. So, in answer to your question, I’m probably slightly more on the pessimistic side. And the reason for that is what’s happened to the UK consumers and the huge squeeze on their real disposable income, so their incomes after inflation, seeing a huge hit to that. And that’s going to have a knock-on impact on the economy going forward, because that’s going to squeeze both demand potentially, but also fulfilment and activity. And of course, one thing we have to remember is that consumer spending accounts for large part of the overall UK economy, around two-thirds, so that could have a good, quite a significant, knock an impact on overall economic growth as you move forward.

IW: Kitty mentioned sectors, and maybe on a sector-by-sector basis. Do you see when you’re talking to members, are there particular high levels of confidence for particular sectors, low levels of confidence for others? What is that showing you?

ST: Well across the board there’s been an awakening of confidence, but we are seeing a particularly weakening confidence amongst consumer-facing firms. Now, of course, these firms are hit hard by COVID, because a lot of them were shut down for longer than other parts of the economy. But what we’re also seeing now is those types of businesses like restaurants, like hotels, are possibly more exposed to current headwinds than other sectors, because they are more exposed to changes in consumer spending, for example. And what we’ve seen over recent months is retail sales start to slide on the back of this increase in inflation squeezing incomes.

IW: So, Kitty, you’ve produced at the IoD a recent survey about inflation, and I think that’s the most pressing economic challenge, certainly in terms of the front and centre of businesses’ minds. I think it’s fair to say inflation wasn’t born here, but it seems to be growing up here. I mentioned the survey that the IoD has produced, in which you comment about: are we going to see persistent price rises? How long should we expect them? Could you expand on that? What was that showing you?

KU: Yes, I think perceptions of inflation are absolutely key to what’s going on here. So, Suren rightly mentioned that business confidence is very low, but it’s low because they look at the world around them and say, “Woah, we’ve got unstable prices, the first time in our sort of memories that they’ve that they’ve been this high. Therefore, our confidence is low.” What they’re not, on the whole, saying is, “Woah, I’m looking around and my order book has collapsed, and I’ve got no one ringing up, the phone has stopped.” They’re not saying that. So that’s why we need to really understand the role that inflation is playing and how we’re perceiving the economy at the moment.

What our survey shows is that our members who are typically small and medium-sized companies, business leaders sitting around the boardroom table of those types of firms, is that they think inflation won’t peak until well into next year. Whereas the official forecast from the Bank of England and probably most economists is that it will peak with the rise in the household energy price cap in October, and then start to fall towards the end of the year and into next year.

Now, in a sense, if business leaders are shown to be wrong, as inflation actually does start falling, obviously their expectation will shift, but that’s potentially a problem, because if they think inflation is going to persist well into 2023, then they may make business decisions accordingly, based on that assumption, which will then affect the rate of inflation itself.

So, a really simple example is, if I’m running a business, and my supplier rings up and says, “I’m really sorry, got to raise prices, you know, it’s this inflation, energy, our input costs, happy to break it all down for you, but prices are going up by whatever percent,” if you believe that inflation will persist, you’re less likely to haggle. You’ll go. “Yes, I understand it’s really quite difficult. Is there anything you can do? But I’m not expecting you to, we want to support you.” Whereas if you think inflation is going to fall, you’ll go, “Hang on, I’m going to go out to tender again, you know, I’m not quite sure if this is, you know, really what reflects reality, or whether we’ve just got into the habit of putting prices up.”

And so, the fact that our members are saying they think inflation will persist could become, therefore, self-fulfilling to a certain extent. And so, the Bank of England’s got a bit of a job of work to do to show that they’re kind of on it more than they, people think they are on it at the moment.

ST: Yeah, I was going to say, there is some good news around, I think you’re right, I think that one thing we need to look at is what are consumers’ and business’ perception of inflation over the medium term? We are seeing some good news on the consumer side. We’ve seen surveys from Bank of America, for example, showing their consumers’ expectations of inflation over the next couple of years. It’s actually falling, and they’re pretty steady on wages as well. So that’s good news for the Bank of England. But that’s also quite surprising one way given that inflation is at a 40-year high. So that seems just in some sense that confidence among consumers is really low by their own finances. And I think that’s a slight concern, is that one thing that may drag inflation down is weakened demand, as in consumers can’t afford to pay for stuff.

KU: I think you’re absolutely right that if consumer demand started to fall back, we should all be very, very concerned. Because as you say, consumers are the largest proportion of the economy when you’re trying to work out where GDP changes come from. But there are a few things that should make us a little bit less, kind of, cautious about this. The last time consumer confidence was this low was going into the recession that followed the financial crisis. But at that point, consumers were much more overextended in terms of their credit than they are at the moment. So, it was almost like there was a moment of reckoning where everyone looked at their credit card bill or thought about their mortgage a bit more and went, “Oh, my goodness, I’m overextended, I need to stop spending, I need to pay this debt down.” At the moment, whilst there are some real difficulties, sort of at the bottom end of the income distribution, and households that have been living hand to mouth and on a tight budget, at the top end, maybe the top 40-50%, people are still sort of slightly feeling, “Oh, I’ve managed to build up some savings during the pandemic, I can spend a bit more now, I can go on holiday, and I can run that back down to a level that I’m that I’m used to.” So, although confidence is terrible, because of all this #costoflivingcrisis that is very real for lots of people, and high inflation, in terms of how that translates into behaviour, we have not yet seen what caused the recession in 2008.

IW: I’m surprised how optimistic you’re being that inflation will peak and then come down relatively rapidly. Doesn’t history show it’s very persistent? Kitty, stagflation’s been mentioned – that we’re going to have high inflation, low growth prospects. We saw that, you know, related to energy, in 1973, after the oil price hike. Japan had a lost decade of economic growth in the 1990s. Are we in the UK going to see something similar?

KU: Stagflation is a dramatic headline. Of course, it’s possible. But I think the most likely scenario at the moment is that inflation will peak and start falling relatively rapidly. I think it’ll feel very different this time next year. The reason is that it’s being driven by the high international price of energy, which has risen and is now roughly, sort of flat. So, unless it rises again, very dramatically, then the maths of it, boring I know, means that prices will stop increasing. They’ll just remain at a sort of higher level. So, since inflation is the rate at which prices are increasing, it will then come back down to zero, or near the Bank of England’s target, quite rapidly.

IW: Suren, do you agree with Kitty? Let me ask and maybe Kitty can come in again. I was quite careful in saying inflation wasn’t born here. It’s about energy prices. But it’s growing up here. Because presumably, people are now thinking, “Well actually, inflation is at 9%. I want a 10 or 11% pay increase, and that’s just going to sustain these high prices. Inflation will persist because people will want extra money in their pay packets, won’t they?

ST: I have a similar view to Kitty, I think. I’m relatively optimistic. And there’s a couple of reasons for that. It’s something in the message, you say it’s a ‘new year’ measure of inflation. So, we’re moving into moving to August, where you’re comparing a period where inflation started to jump, because August last year was the first time inflation jumped above the Bank of England’s 2% target. But we’re also seeing, and what’s happening with pay is quite interesting, what we are seeing is regular pay, that’s before bonuses, is picking up compared to the last couple of years. It’s obviously nowhere near where inflation is at the moment. What we are seeing is total pay, which includes bonus payments, one-off payments, actually increasing at around 7% at the moment. So, what you’re seeing is businesses, rather than reacting to higher inflation by giving inflation-linked increases, are looking at more innovative ways of trying to retain staff, so one-off bonus payments, but also things like credit or flexible working, that sort of thing. I think that gives me some confidence as well. What’s also happening is that as the economy continues to flow in recession over the next year or so, a by-product of that is weaker demand, so again this will help keep a level of inflation as well, beyond what we’re seeing at the moment, which is quite a significant energy shock.

IW: And that sounds all really helpful and informative, but people are suffering out there. You’ve mentioned people on low pay. And it might be pushing up the income stream or facing a real cost-of-living crisis because price increases are very evident in the supermarkets, you know, on a week-by-week basis. And then again businesses, if you’re in the building trade you’ll see materials go up 20-30%. How do you help people? And, in particular, you know, we’re in the midst of a Conservative Party leadership contest, we’ll have a new Prime Minister in eight weeks, it could be a new change of economic policy. They’re all talking about tax cuts. Is that the best thing to help people? Or will that just fuel demand and fuel inflation?

KU: I think it’s important to remember the way that policy is made in this country. It is the job of the Bank of England to keep inflation in the medium term near its 2% target. And the way that it does that is it looks at what the government has decided to do, and sort of takes that into account and then sets interest rates and quantitative easing or whatever it’s doing. So, it’s entirely up to the democratically elected government to decide, you know, how they’re going to distribute spending within the economy. And that’s their right to do it. That’s what we elected them to do. So, I don’t think it necessarily follows that if an incoming government decides to prioritise tax cuts, which they can choose to do, that it will necessarily mean that inflation won’t come down as fast, it just might mean that the Bank of England will make different choices to compensate for that. In terms of which tax cuts to do, obviously, that’s the matter that the conservative leadership contest is debating. It’s not necessarily up to business to intervene at this point. But what our members are telling us is that the rise in national insurance contributions paid by employers, you know, just putting to one side what employees are having to pay, has had a massive and negative effect on their profit and loss account, because it’s a flat cost, regardless of whether they’re profitable or not. So, whilst any cuts in business taxation will be relevant, I’m sure, and welcome to lots of people listening to this podcast, if there’s a choice, I think it’s important to go back to that decision that was made in very short notice outside of a budget, outside of the finance bill, that we think was totally unnecessary and is causing real difficulties at a time that supply costs are rising anyway.

IW: Let me move on to the labour market, because it’s interesting, what seems to be happening and businesses who are listening to this will be making decisions, looking at their skills, their workforce, and deciding what can we do next? The labour market seems really odd to me, you know, you wouldn’t expect in this point for it to be, you know, so hot. Has COVID altered it? What are the fundamentals of the labour market? Is it just that we’ve got a mismatch between skills, the supply and demand and what’s out there? Suren?

ST: Yeah, so, I think what’s interesting, I mean, it’s quite an odd picture, where you see the headline ‘unemployment rate is below where it was pre-COVID’. But a lot of that is driven because the size of the workforce is smaller now, compared to what we saw before COVID. There are a couple of reasons for that. We saw a lot of overseas workers leave in the aftermath of Brexit. But what we’ve also seen is a lot of people over the age of 50 leaving the labour market voluntarily, partly due to long-term illness. So that’s had an impact, shrinking the workforce. So, you see the number of job vacancies consistently at a record level, while you’re seeing the economic inactivity rate, which is those who have voluntarily left the labour market as it were, actually increase over this period. So that’s having a constraint on the UK economy because you can’t find people to fill jobs, chefs for the restaurants, that sort of thing. I think we’re seeing that real on-the-ground impact of those constraints, and that’s having an impact on wages, but it’s also having an impact on inflation as well. And that sort of tight low market.

IW: What can we do, Kitty, on that? Is Suren right in terms of that grave wave of resignations? Are they concentrated about people in their 50s? And is it not about: COVID hit March 2020, people started to reevaluate about their lives and think, “I don’t want this anymore, you know, life’s too short. And we’ll go off and do something else that I want to do.” Or is it, as Suren was saying, actually wasn’t through choice, it was through illness? Has Long COVID had a long impact upon the labour market? And what do we do about that?

KU: I think it’s all of the above. The Office of National Statistics has done some work and the biggest single group is people who are now declaring themselves as too sick to work and these are people pre-retirement age. That’s a rather sad and sorry story. You’ve got another group who’ve taken early retirement and another group who have said, you know, for lifestyle reasons, they don’t want to do this anymore. You’ve got people staying at college longer, which makes sense if it’s an uncertain jobs market. And then set against all of that you’ve got more people working, who had previously said that they couldn’t work because they were, I think the category is looking after family or home. And so that suggests perhaps that the rise in remote working is making labour force participation easier for some categories of worker, which is quite exciting for businesses because it means they can tap into new talent pools.

In terms of what can be done, I think it depends on what happens to the labour market in future, if it continues to run really hot. And we have to remember, you know, that whilst it might be sort of frustrating to find your real wages going down a bit, that’s nothing compared to what happens to your income if you lose your job. So at least people are in work. If it continues to run really hot it may be that some of that unwinds slightly, as you know, a few years in people’s lives readjust and they decide they do want to take part. If it ends up being that there are far less vacancies and less opportunities, I suspect this may be something that just passes through the generations and we’ll have to wait for the sort of natural passage of time before this, this sort of lump of people, number of people who are older have left the labour market to adapt to vanish naturally.

ST: And then just going back to your earlier point about what the government should be doing, or any prospective Prime Minister should be doing in this space. Of course a lot of focus has been on tax cuts. And while that sort of targeted fiscal support to those consumers and businesses that are really struggling is important, what they should really focus on is addressing some of the supply-side constraints, which is pushing up inflation, and also limiting economic activity, particularly when the labour market is looking at what can be done to help people get back into the labour market ifthey want to. You know, looking at retraining schemes, looking at making things like the apprenticeship levy more flexible. So, businesses can use the funding as they wish. Those sorts of measures will help try to get people back into the labour market as well. But also in the short term, what they need to be, because that’s more sort of long-term changes, is to look at how we can get people, you know, from overseas back into the labour market, looking at things like occupation lists, looking at expanding that as an interim measure to try to fill in those vacancies.

IW: But, Kitty, Suren’s just mentioned about short term and long term and you know, changing the apprenticeship levy, getting more people into further and higher education, are good long-term ways in which we can expand the skills base for the knowledge economy. I get all that. But businesses are having to make decisions now, aren’t they? And are you finding that, are your members saying, “Look, we could really grow, we could expand, you know, there’s a big bounce and demand post-COVID, but we haven’t got the staff.” I mean, you’re seeing that in airports, you’re seeing it in other parts of the economy. Are businesses making that choice? We’ll either grow faster, and that helps the economy, or we’re just going to have to curtail our services. What can be done when that seems to be down to staff?

KU: Yeah, they are certainly saying in our surveys that staff shortages are a major pain point for them. And they also think that responsibility for that is split between the private sector and the government. So, they’re looking for greater partnership working. I think there was quite an interesting example last autumn when there was a much-publicised shortage of HGV drivers, and you found, you know, quite immediate interventions of some companies and working with the government in order to get more people trained up and through. And I think that that has to be the short-term approach. What we think where the gap is, is a proper understanding of where current and future skill shortages are likely to be. And we think there’s a gap for a sort of technocratic government agency or something that can advise on that. And then flowing from that there are policy implications that come out of it: maybe tax breaks, if you’re an employer, and you train people in that particular area, for example, or channelling training provision in those particular skill shortage areas. And in terms of, you know, Brexit, there was a mandate for Brexit and part of that mandate was not to have greater immigration. That’s effectively the democratic interpretation of what happened. So now what we’re saying is the government needs to take the next step and make sure that we are home-growing the skills that we need. And I don’t think we’re quite there yet, in terms of government action.

IW: I mentioned earlier on that I think inflation is, you know, the big front-and-centre economic challenge that businesses are facing. But I’m really interested in productivity. Because I think, actually, in the overall scheme of things, that is the structural challenge that the economy faces. Now, business leaders, people listening to this, might have different views on global productivity, it’s not front and centre about what I’m thinking about. But presumably, the efficiency and effectiveness in which we produce stuff is really important for our competitive position. And it’s the way in which we see living standards rise. Productivity, as GDP per hour worked, is now higher than it was before the pandemic, but it’s reduced in 2022. And by international standards, the UK is about 15% behind France, the US and Germany. What should we do about productivity? What can businesses be doing in order to make us more competitive, to make us more innovative and ultimately help raise living standards? Is this the big puzzle, Kitty?

KU: Well, I think productivity puzzle has almost become a cliché. It’s a very important question, Ian, and you’re absolutely right to ask it. We could probably talk about it for hours. Let me try and do so efficiently. The link with inflation, of course, is that if you think the world is an uncertain place, then you’re going to hoard cash and not invest it in things that might raise productivity and growth of your own business in the future. So, there’s a confidence problem there. What we’re saying is that, when you’re in that situation, that government policy needs to work even harder. And so having a bit of policy instability with a change of leadership is not helping in that regard, because the outgoing Chancellor had made it very clear, for example, that he was going to make the capital allowance tax super deduction, a bit of jargon there, but, you know, make it more advantageous to invest, he was going to make that temporary measure permanent, was also going to look at tax credits for workplace training, there’s lots of work going on to encourage digitisation, all of which have a direct effect on productivity. So, we think there’s loads that that can be done to try and sort of shift the dial permanently on this.

IW: Suren, I’m really interested in what Kitty says, you know, and far be it from us to advise the Conservative Party leadership candidates, but in terms of, you know, policies that will really help businesses, is it what Kitty suggests, you know, you’ve got to incentivise businesses to invest. You don’t have a tax on jobs in terms of national insurance contributions from employers. What would you be suggesting in terms of boosting our productivity?

ST: Well, firstly, I think that productivity is a huge issue, and I think it feeds into some of the wider policies like Levelling Up, for example, where productivity in London is much higher than other parts of the country, for example. But I think there’s probably two main areas I would focus on. I think what we talked about earlier on, skills, around trying to keep skills within the business. I think that’s what they will talk about on-the-ground productivity, trying to keep people’s skills within a business. You know, if you train someone up on the apprenticeship, for example, and if they go off somewhere else, that impacts your business. So why would you invest in them in the first place.

I think looking at ways you can retain people, I think it’s quite important. But another area, I think you mentioned, business investments is a really key area, and that’s where the UK has lagged quite significantly over the last few years. For example, last year, we saw the overall UK economy grow by its highest rate since around the 1940s. Business investments actually fell last year, and actually there are a number reasons for that, not least the wider environment, and I mean certainly not linked to Brexit, but other factors as well. But I think incentives are absolutely important. So, I think super deduction is one area, but also I think it’s not just one lever to pull to boost business investment, it’s looking at what businesses are investing in. So, you’re looking at investing in ideas, for example. So, looking at whether the R&D tax credit can be reformed, I think that’s another area as well. But also, again, going back to our discussion on the labour market, looking at ways of providing incentives to train people, you know, some sort of tax credit, for example, to support businesses. You want to train people up. I think that’s something that will actually help sort of boost business investment, and thereby overall productivity.

IW: Kitty, I was struck by some of your comments earlier on about uncertainty. And if you think back to 2008, we’ve just lived in a world of uncertainty, it’s crisis after crisis. It’s just the context. It’s just the environment that we live in now. So that being the case, you know, we’re never going to get, I can’t see a scenario where we have a sort of benign set of boring global indicators. We’re not there. Even if you don’t think about shocks like pandemic and invasion of countries, it’s things like technological revolution, and ageing population, that sort of thing. So why can’t businesses think: “I can’t hold cash. This is not a fruitful use of our assets, our capital base. We need to we need to invest to think about it.” Why don’t businesses have that sort of mindset? Because we’re never going back to a boring global world where nothing happens.

KU: Well, maybe this is where organisations like ICAEW and the Institute of Directors can help by providing insights just like this. And what I say to our members when I meet them around the country is there is a very high perception of risk at the moment. But in terms of actual tangible, you know, indicators of impending crisis, we’re not seeing that, but we are seeing businesses make decisions because they think the things that they can’t control, ie, the external environment, might be pointing downwards. So, they’re hoarding cash, they’re building up inventories, they’re, you know, perhaps using invoice financing to a greater extent to make sure they have more cash around and so on. So, what I say is that everyone’s feeling worried at the moment. That means your competitors are also feeling worried. And so if you think the fundamentals of your business are actually okay, you know, get into the weeds there, then you should be investing for your future, because it may be that your competitors are too nervous to do so, and in the medium term that will help you.

IW: Suren, what’s your view about this, in terms of holding cash in a high-inflationary environment? It doesn’t seem a great use of that asset. Do you agree with Kitty?

ST: I think, as you said, there is that to a certain degree, we’re seeing businesses trying to hedge against future uncertainty. You know, we’ve had examples where people’s energy bills have increased from like £5,000 to £40,000 in just a few months. And there’s a perception that that trend may continue to an extent. So, you are getting that sort of behaviour. But I think going back to what we’ve seen in last couple of years is quite interesting, to cope with COVID, where you saw businesses adapt to change, innovate, albeit in a stress circumstance, but we saw some restaurants move to takeaway, use digital services, that sort of thing. I think that sort of innovation is really encouraging, and trying to foster that over the long term, I think, is something that will help boost productivity and overall activity.

IW: Kitty, I said, we will have a new government in eight weeks, and we might have a new chancellor. New chancellor calls you into the treasury and says: what helps businesses? What helps your members? What would you be advising him or her?

KU: I would say businesses at the moment are facing really high costs. Lots of that you can’t do anything about, Chancellor, but you did decide to increase those costs by raising national insurance contributions for employers. And that’s something that you should reverse. The public finances can deal with that. I would say you need to aggressively make it far, you know, use the tax policy to combat some of this external risk that people are seeing and make it incentivise firms to invest. So, whether it’s through the super deduction for fixed capital, or whether it’s through tax credits for training in skills shortages areas, being really kind of front foot about that would make a big difference. And those are probably the most important things. In terms of net zero, we’ve been talking about corporation tax. I think there’s an argument in the medium term to have a kind of wedge between the corporation tax rate paid by net-zero firms, compared to those that aren’t net zero, to get a really strong business incentive to invest in the change that’s required there. I think that’s four things, all of which are quite chunky. And if you did all of those, I think we’d be very pleased.

IW: Suren, is there anything that you would add or detract? You’ve been called into the same meeting with the new Chancellor, and the Chancellor says: “160,000 chartered accountants, they’re running businesses, they’re making business decisions, they’re advising businesses on a whole range of things about how to grow, how to be more productive. What are your members telling you that you could then pass on to the Chancellor to make their lives better and easier?

ST: I think the first thing for any new Chancellor to be realistic about some challenges around tax and spend over the next couple of years, because there’s going to be quite significant, not least on the back of COVID, but also what’s happening in the moment, you know, regarding tax receipts if the economy starts to contract. But I think there needs to be a focus on what you’re taxing. If you’re going to tax businesses, what are you taxing? Now, the big challenge at the moment, as Kitty mentioned, is costs, is your sort of sunk costs you pay no matter how well your business is doing. You know, like national insurance, like business rates are the big ones. If you find businesses and more headroom in that space, well maybe not necessarily push here with the headline “corporation tax rise”, for example, or cutting as some candidates are mentioned, which looks good on the global stage, but on the ground doesn’t really help businesses who are struggling. So, looking at giving businesses a bit of financial headroom, I think that’s something I would say. But also looking at some more fundamental challenges around those supply-side constraints, like looking at trying to help businesses reskill people. That sort of thing is going to help both with some of the current challenges, but also some of the future challenges as well as the economy starts to adapt and move towards a greener economy.

IW: We’ve run out of time. That’s it. Many thanks to our guests, Kitty Ussher from the IoD, and Suren Thiru from ICAEW. And thanks for listening to this special episode. If you’ve enjoyed it, remember to rate, review and share, and of course subscribe to ICAEW Insights wherever you get your podcasts. Thank you.