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Sector braced for impact of ‘brave’ Budget

Fashion leaders hailed Chancellor George Osborne as having delivered an “encouraging” and “brave” Budget but said they were stealing themselves for a rocky run into Christmas and spring 11 until consumer confidence stabilised.

The industry welcomed Osborne’s plans to lower the National Insurance threshold and reduce corporation tax for large and small businesses.

However, Osborne’s emergency Budget confirmed that VAT would rise from 17.5% to 20% from January 4, but most retailers told Drapers they were more concerned about a potential fall-out in consumer confidence from potential public sector job losses and that they had already prepared for the widely forecast VAT rise. The next key date on the political calendar will come in October when Osborne will announce a breakdown of spending cuts.

The fashion sector has already felt the pinch of a dip in consumer confidence post the general election in May. Sales have been extremely volatile between the election and this week’s Budget, with retailers pinpointing certain regions, towns and cities with a high concentration of public sector workers as being particularly difficult trading spots as these shoppers rein in spending. Public sector pay freezes were also a concern.

Aurora Fashions chairman Derek Lovelock said: “The VAT increase was certainly not a surprise; at least this means we’ll all have a bumper Christmas, but I think it will be one hell of a hangover in the new year.”

He added: “The impact that measures such as public sector savings will have on consumer spending, combined with cost pressures from the exchange rate, commodity price increases, Chinese wage inflation etc mean there will be pressures on both sales and margins for the foreseeable future.

Neil Clifford, chief executive of footwear retailer Kurt Geiger, added: “From a consumer’s perspective, there is no doubt it will be tougher in the short term, but a necessary evil. Doing less would have been worse in the long term.”

Harvey Nichols chief executive Joseph Wan said: “The VAT rise will be bad for spending in aggregate but the challenge for retail businesses is to find new ways of gaining market share. Only the fittest will survive.”

New Look chief executive Carl McPhail said the public sector cuts were “harder” than he forecast.

“We thought the macro-economic signs were nowhere near as gloomy but our recent experience with the hung parliament and waiting for the Budget has been tough.”

Pentland Brands chief executive Andy Rubin said: “The pressing concern is about unemployment and potential loss of jobs in the public sector. That seems to be more important than the VAT rise, which was not a surprise to anyone.”

However, Asda chief executive Andy Clarke added: “The economy will remain tough for a long period and there will be no sudden movement in confidence. Unemployment will continue to be on people’s minds and our role [as retailers] is to continue to be a strong business and open more shops to employ more people.”

Other retailers said that while they agreed with the “tough measures” implemented, they were trimming their forecasts as a result.

Colin Temple, managing director of branded footwear chain Schuh, said: “If I’m budgeting for next year I might knock a couple of per cent off like-for-like sales.”

The VAT rise was generally thought of as the “fairest” way to claw back money to reduce public sector net borrowing, which stands at £149bn this year, with retail and brand bosses saying that although prices would increase, consumers could still “vote with their” feet and choose what product to buy.

JJB Sports chairman John Clare added: “The consumer is in for a rough ride over the next two years, the Budget has proven that. This year and next the economy may not be in recession but the consumer is going to face a much more difficult time.”

Tony Brown, chief executive of indie department store chain Beales, summed up the mood: “The Budget is good for the general industry and private enterprise. But I think the consumer will be as cautious as they are now.”

Budget breakdown: Osborne on…

VAT…

VAT will rise from 17.5% to 20% on January 4. Kidwear remains exempt.

“This single tax measure will by the end of this Parliament generate over £13 billion a year.”

Spending cuts and tax rises…

The total annual package to rise to £40bn by 2014-15.

“[The public sector] must share the burden as we pay to clean [the recession] up.”

National Insurance…

From April 2011 the NI threshold will rise by £21 per week above inflation.

“We argued that imposing a jobs tax was the last thing Britain needed in a recovery, and the businesses of the country agreed with us.”

Corporation tax…

The current rate of 28p will drop by 1% each year to 24p.

“I want a sign to go up over the British economy that says ‘Open for Business’.”

Small companies tax rate…

Cut to 20p from 21p.

“I’ll extend the Enterprise Finance Guarantee Scheme, which supports small and medium enterprises’ access to lending.”

The regions…

New businesses set up outside London, the Southeast and the Eastern region will be exempt from up to £5,000 of employer NI payments, for each of their first 10 employees hired.

“We need a new approach. One that empowers local leadership, generates local economic growth, and promotes job creation.”

Unemployment…

Rate is forecast to peak this year at 8.1% and fall to 6.1% in 2015.

Interest rates…

“Tighter fiscal policy can enable interest rates to stay lower for longer.”

Capital gains tax…

The 10% CGT rate for entrepreneurs will be extended to the first £5m of gains, up from £2m.

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