Michael Izza, CEO of the Institute of Chartered Accountants in England and Wales, discusses the recession, public sector spending and why not even HMRC understands the tax code anymore.
As part of the launch of the ICAEW's launch of its 2009 Enterprise survey findings for the South West region, Michael Izza spent the day in Bristol meeting with local business people and listening to their views on the challenges and opportunities of trading in the current economic climate.
In an exclusive interview with AccountingWEB, Izza revealed his thoughts on the current recession and how accountants are coping with the increased demands on their businesses. You can watch our exclusive video online, or read on for more details.
Q: In the ICAEW's Eneterprise survey, 54% of respondents said UK regulatory and tax environment was ‘not very’ or ‘not at all’ business friendly. Employment tax and legislation and business tax changes were all regarded a hindrance. Why do you think businesses responded so negatively and what do you think can be done to improve the situation?
A: "This is a constant refrain, and we hear this from businesses of all sizes. We have a great opportunity this year because we’re moving into the last few months of this government, there has to be an election no later than June 2010 and this is now the time when business people of all sizes can start to talk to their MPs (or prospective MPs) about the things that bother them and the legislative changes they would like to see.
"The institute has issued a manifesto and that was something we were talking to politicians about at the three main party conferences in September and October. One of the themes in it is that we need a more simplified government in this country. An area which I’m sure many of your members will be familiar with is the tax code. The tax code in this country now runs to over 11,200 pages. There is nobody in HMRC who understands that from A-Z. There is no chartered accountant in this country who understands it from A – Z, it’s just become too complicated. We have an opportunity to make something like that more simple, for everyone in business. This is the sort of thing we should be talking to the politicians about now and saying we want to see it changed.
"We’re at one of those moments in history where because of the economic crisis that we’ve just experienced and the fact that things are going to be very different going forward, we might be able to make a very significant change in something like that; and that’s the sort of thing the institute is going to be asking for".
Q: The survey also discussed people’s views on how long the effects of the downturn would last. What’s your take on this? What shape do you see the current downturn taking; will it be a ‘W’, with another rock bottom for us yet to hit, or do you think we’re on the recovery curve now?
A: "Our members have told us that they’re certainly a lot better than they were 12 months ago. In our most recent business confidence monitor, we did get some unprecedented bounce in terms of peoples’ confidence; that was coming from a very low position. This confidence monitor is produced by talking to just over 1,000 of our members who effectively run British businesses, large and small. Although they’re more optimistic about their trading prospects for the next 12 months, there is an underlying theme of it being very fragile.
"So in answer to your question as to do we see this as a ‘V’ shaped recovery, a ‘W’ shaped, or a saxophone shaped recovery, or whatever musical instrument you want to bring in as a metaphor, I think we have to be very careful and just not assume that things are going to go back as they were.
"We know, for example, that the public sector is in a terrible state in terms of its finances, and so making some very draconian changes to public sector finance could have the impact of sending us back very quickly into a recessionary environment before we’ve even got out of the last one.
"Our members are telling us that things are certainly very fragile at the moment, but it is a mixed picture. For every one of our members in business who I’ve talked to who has been telling me things have been terrible and in the last 12 months’ they’ve had to worry about whether they going to have enough money to pay the wages on a Friday, or whether they are going to be able to pay HMRC their VAT bill, I’ve had someone else who has been telling me that actually things haven’t been that bad, they're trading ok and may even have a bumper year. All in all, it’s a very mixed picture and it’s also mixed across the country. I don’t see any part of the country being more depressed than another, but I’m sure people will have their own strong views on it".
Q: A recent ACCA study indicated that the public sector could be feeling the effects of the recession longer than everyone else, up to 15 years. How do you think the government is handling spending in the public sector?
A: "This is coming dangerously close to asking me express a political opinion which the institute doesn’t do because we’re not party political, but let me say that during the crisis that we faced when Lehman Brothers went down and inter-bank lending dried up, we had to see government action. In so far as what our government did in terms of stabilising the banking system, I think they’ve done what they needed to do. You can disagree as to whether or not they got some of the finer points right, but effectively we’ve returned to a much more stable banking system, and nobody’s worried that the bank is going to disappear, so in terms of that policy objective, that’s been achieved.
"In terms of using Keynesian economics to stimulate the economy by pumping more money in to drive demand, that is something that has been widely supported by other governments around the world, and I think it has staved off the worst effects of the recession.
"Let’s not forget that it was only nine months ago people were asking ‘is this going to be a depression or a recession’? Nobody is talking about a depression or a slump at the moment, everybody is talking about how quickly recovery is going to come and how strong is that going to be. I think if you look at the government policy from that perspective, I think you can point to lots of things they’ve done that have been reasonably successful.
"The key issue now though is how do we get our public finances onto a more stable footing, and the figures you mentioned which suggest its overhang being in place for 15 years, I would say that that’s at the extreme end of people’s views, but in my opinion, the life of the next parliament (which will probably be five years,) is going to be dominated by the actions that the next government has to take to get us back onto a more sound financial footing.
"There has been a lot of talk at the moment about the cuts that people will have to make. I personally don’t believe you can solve the position we’re in by cuts alone. I think there will have to be further revenue raising measures, and that will probably involve increases in certainly the income tax side and possibly VAT. There are some very difficult political decisions to be made in the next parliament and I don’t envy politicians that task.
"The great thing for accountants is that for the first time in several elections, taxation and the economy is a real issue, possibly number one or number two. People want to know what we think and we should be prepared to tell people what we think, particularly politicians".
Q: What should accountants be doing to support their clients’ businesses during the recession?
A: "First of all accountants, and let me say, chartered accountants, should be getting as close to their clients as they possibly can (if they aren’t doing it already), because their clients need help. Over the past year we have been encouraging our members to do just that.
"Earlier this year we produced our 'Seven Strategies to Survive the Downturn', which was on our website and was widely downloaded. That’s something people can use themselves, but it's also useful for taking to clients and working through it with them. The other thing we’re starting to turn our minds to now is how do you help clients prepare for the recovery, because there isn’t any doubt that people will have taken actions to conserve cash in the last year and they now need to be turning their minds to how to make sure that their businesses, whatever size they are, are as well positioned as they can possibly be to take advantage of an upturn. Is it going to mean more investment of capital structure? Is it going to mean more marketing? All those things are areas where your professional advisers can have legitimate input to your company’s management".
