Interest Rates Are A Business Straitjacket As FSB Urges Government To Raise VAT Threshold

The Bank of England has shocked economists and investors by raising interest rates half a percentage point to 5% – the highest level since 2008.

FSB National Chair Martin McTague said: “The Bank of England (BoE) is risking economic slowdown across our small business community, with a jarring 0.5% increase in interest rates. We are standing at a crossroads. Inflation and interest rates are unrelenting.

“An increase in interest rates comes as no surprise – it’s a tried-and-trusted lever to pull in such times – but the size of the increase will hurt, and rate rises are not a magic wand in reducing inflation. This was driven by the highest core CPI rate in 30 years, but it has significant repercussions for everyone, not least for the 1.5million on variable mortgages.

“While higher interest rates are a tool to control inflation, the weight of escalating costs means consumers have less disposable income to circulate in the economy. When the money in their pockets is worth less, the upshot is reduced sales for businesses.

“It’s like adding another heavy load to an already full plate. Banks have a responsibility to show understanding and patience, especially to those who took variable-rate Coronavirus Business Interruption Loans (CBILS) and are now faced with higher costs. Instead of treating loans as just another expense, we need to think of them as a lifeline to keep small businesses trading during these challenging times.

“High street retailers, start-ups, local bakeries, and tech innovators alike are all feeling the pinch. As the weight on the small business and self-employed community grows heavier, we must strike a delicate balance. Our entrepreneurs need room to breathe, room to innovate and crucially room to grow.

“To help consumers and businesses, the Government could raise the VAT threshold from £85,000 to £100,000. This move could cushion some of the hardest blows of inflation, preventing tax increases from exacerbating the impact of price hikes on businesses and in turn, their customers.

“Meanwhile, energy suppliers should allow firms to ‘blend and extend’ their contracts so they can take advantage of lower wholesale prices. Late payments should also be a top priority, as unpaid invoices can stifle growth and stability.

“Our latest Small Business Index (SBI) survey reveals a stark snapshot of our current economy. We are seeing a divide, where 40% of firms encountered a dip in sales in the first quarter of 2023, while a third managed to increase them.

“This is a testament to the resilience and determination of our small business community – 46% of them said they were optimistic for the upcoming quarter.

“However, rising interest rates are not just numbers on a page, they are lived realities that influence consumer behaviour. The BoE should proceed with caution, mindful of these broad-ranging effects.”