Overall, some help with liquidity but little hope of increased demand or a reduced cost base. Retailers will therefore be no better off as a result of the budget. Empty high street stores are likely to remain for some time, along with the prospect of further store closures and increased levels of retail un-employment.

In detail

Highly important to the economy, the retail sector employs approximately 11% of the UK workforce.

The fall in house prices and rising levels of unemployment have instilled a new thrift in the consumer and most of the retail and leisure sector and their suppliers continue to suffer. The cut in the rate of VAT was too small to have a tangible impact and for many retailers was more of an irritation. Even the fall in mortgage interest rates, which has generated a short-term rise in disposable income for many, has had only marginal impact on consumer spending and the fall in the value of sterling has increased prices of imported goods and further squeezed retailers’ margins.

With consumers only too aware that interest rates and the overall tax burden must rise in the future to pay for the record escalation in public sector debt, what comfort do the Chancellor’s proposals bring to the retail sector?

Unfortunately the answer appears to be very little. From a Chancellor with little room for manoeuvre this was a taxing and borrowing budget coupled with reductions in future spending and the benefits on offer were few. Specifically, there is little relief for the people and property costs, which form a major part of retailers’ outgoings.

The forecast fall in GDP of 3.5% for the year as a whole is indicative of continued hardship and further falls in employment are likely to feed through to reduced consumer demand. By and large the tax burden on individuals has increased with an impact on future disposable income of higher earners.

15% VAT rate returns

The Chancellor confirmed that the current 15% VAT rate would return to 17.5% at the end of the year. However, he did not take the opportunity to follow the recent ruling by the 27 EU member states that would allow a reduction of VAT to 5% on labour intensive services, such as catering and hairdressing. Perhaps unsurprising, given that each percentage point movement in VAT across the board has approximately a £5 billion impact on the Treasury.

Pre-budget the Chancellor confirmed that a 5% rise in Uniform Business Rates would be spread over three years, but there was no announced respite on business rates, nor was there any backtracking on last year’s abolition of rates relief on empty properties.

Increases on fuel, drink and tobacco

Increases in taxes on fuel (2p per litre from September), drink and tobacco (a 2% rise from now) were always expected, but remain detrimental to the retail sector with an increase in fuel adding to distribution costs and a reduction in disposable income for consumers.

Liquidity has been an issue in much of the economy including the retail sector. However, two measures may help here:

• The extension to loss relief until November 2010 allows businesses to reclaim taxes through the carryback of losses for three years
• The top-up to the trade credit insurance scheme, where cover available from the private sector is reduced or withdrawn

Car scrappage

The announcement of a scrappage allowance of £2,000 on cars over ten years old follows the example set by France and Germany and may have a positive short-term impact on the automotive sector. However, it is unclear how much of this benefit will be exported to overseas manufacturers and the scheme may have a negative impact on used car prices.

An acid test for retailers is whether or not the budget will increase confidence among consumers about future prospects, jobs and homes, which may translate into increased spending. However, the disclosure of the full scale of the Government’s borrowing and the depth of the current recession may well have the opposite effect.