Budget speculation, the economy returns to growth, the impact of cuts, and the disability employment gap
Three weeks still to go, and speculation about what will be in the Budget on 30th October continues (writes Fraser of Allander Institute’s MAIRI SPOWAGE, SANJAM SURI and EMMA CONGREVE).
Will the Chancellor change her fiscal rules? It looks likely that there will be some movement on this, whether in the definition of debt or something more fundamental, however much that could undermine their commitments in the manifesto.
Will there be increases in Capital Gains Tax? The speculation on this has reached fever pitch, with some stories suggested rates from 33% to 39% are being considered. (Interestingly, when we look at the ready reckoners from the HMRC, changes of this magnitude in some forms of CGT actually may result in less revenue when behavioural effects are taken into account). There certainly seems to be expectations out there in the economy that the rate may change, with lots of signs that disposals have increased hugely in anticipation.
Will there be increases to employer national insurance contributions? There has been much discussion about this, given the commitment of the UK Government not to “raise taxes on working people”, and due to the fact that the PM would not rule this out this week. A 1 percentage point rise in employers NICS would raise almost £9bn according to the ready reckoner (although we think that doesn’t include the additional costs to departments).
We’ll be going into the detail of some of these issues in the run up to the Budget, so there will be plenty for you all to chew over as we wait… and wait… for the Budget.
UK Economy Returns to growth in August
Data released this morning showed that the UK economy posted its first monthly GDP increase since May 2024. ONS reported this morning that monthly real GDP grew 0.2% in August 2024. There were no revisions made to the “no growth” months of June and July. While monthly numbers were in line with consensus forecasts, they show an economy that has slowed down from the beginning of 2024.
The good news is that growth in August came from all key sectors- with services rising by 0.1%, and production and construction rising by 0.5% and 0.4% respectively. Crucially- August was also the first time all three sectors positively contributed to growth since March 2024.
A more granular breakdown of service sector growth indicates that the biggest positive contribution came from the professional, scientific, and technical activities subsector- where monthly change in output was +1.6% from the previous month. Despite overall growth in services sector- seven subsectors saw decline in economic activity- with arts, entertainment, and recreation falling 2.5% over July 2024.
The production sector grew by 0.5% in August after hefty decline of 0.7% in July. Despite a rebound in August, the production output is essentially flat since the end of May 2024. The biggest contributor to production sector came from 1.1% rise in manufacturing activity- driven by transport equipment manufacturing However, mining and quarrying output declined 4.0% over July 2024- continuing their downward trend since end of December 2023.
What is the impact of cuts in spending?
When the Scottish Government presented their Fiscal Statement to parliament in early September, the Cabinet Secretary for Finance said that impact assessments had been done to understand the impact that the announced cuts could have on different groups.
These assessments were not published at the time, but finally were published last week. We welcome the publication of these, and although there are lots of criticisms that could be made of the assessments, it is good to see this transparency. One area of weakness is assuming that if funding was maintained at previous levels, there will be minimal impact, which assumes that previous levels was the correct level… so why was the budget being increased in the first place?
One of the main things to note though is the lack of analysis of cumulative impact on groups. A number of “minimal impacts” could still add up to something significant if they are affecting the same group.
Final report of the parliamentary Inquiry into the disability employment gap published
In 2016, the Scottish Government published A Fairer Scotland for Disabled People, which outlined how the government intended to shape policy – especially labour market policy – for disabled people living in Scotland.
One of the key goals this report outlined was reducing the gap in the employment rate between disabled and non-disabled adults. In 2016, 80.4% of non-disabled working aged adults were employed in Scotland, compared to 42.8% of disabled working aged adults, making for an employment gap of 37.5 percentage points. The government’s goal was to cut this gap in half by 2038.
In 2023, the Economy and Fair Work Committee in Scottish Parliament launched an inquiry into how this policy goal was going. In fact, in 2023, it seemed like it was going quite well.
The gap was down to 30.3 percentage points, which was actually ahead of schedule: if progress were linear, the disability employment gap would drop by about 0.85 percentage points each year, meaning that it would be 31.5 percentage points in 2023.
Two of our economists at the FAI, Allison Catalano and Christy McFadyen, contributed to this inquiry through a fellowship with the Scottish Parliament Information Centre (SPICe). Their work, which we published back in January, found that the majority of the change in disability employment is due to a rise in disability prevalence, rather than any specific policy.
Their report also highlighted some significant data issues: people with different types of disability have vastly different capacities for employment, vastly different support needs within employment, and vastly different rates of employment. Yet, in Scottish data and policymaking, disabled people are often treated as a singular entity, meaning that it is not possible to understand where policy interventions might be most effective.
The final inquiry publication highlights our work and a variety of other issues which will need to be addressed in order to improve work access for disabled people, all of which can be found here. They have produced 44 recommendations to improve employment prospects for disabled people.
Edinburgh’s pupils continue to be among the best performing in Scotland
Results from the SQA Insight report shows Edinburgh’s learners are performing better than their virtual comparators in 14 out of 15 key measures, with 7% more pupils gaining at least one Advanced Higher than in other areas in Scotland.
Edinburgh learners are also out-performing their virtual comparators in Literacy and Numeracy for all stages and levels.
A virtual comparator is a sample of students from other areas of Scotland who have similar characteristics to a school’s students.
The news builds on the SQA exam results in August showing levels of attainment for pupils across Edinburgh remaining above those achieved before the Covid pandemic.
Insight provides teachers and lecturers with a summary of how learners have performed in their exams and coursework for each subject at National 5, Higher and Advanced Higher level over the past year.
Councillor Joan Griffiths, Education Convener for the City of Edinburgh Council, said: “This has been another positive year for our pupils. I want to congratulate them, as well as all our teaching and support staff. Their hard work has certainly paid off and praise should go to them as well as all the parents and carers who have supported the children.
“I welcome the results from the SQA Insights report. We have invested heavily in improving the skills of our workforce and I am confident that our staff will continue to improve the quality of teaching and learning to meet the needs of the city’s young people.
“Let’s not forget there is no wrong pathway for our young people as everyone’s learner journey is different. School is about ensuring all our young people are able to fulfil their potential by attaining the highest level of achievements possible and by receiving the best possible experience.
“We want all our learners to find their pathways into the world of higher and further education, employment or training and to narrow the gap between those living in different areas of affluence.”
Course reports – written by principal assessors and principal verifiers – are published to give an insight into how learners performed, detailing which areas of the course assessment where learners performed well, and which areas proved to be more demanding.
Principal assessors and other senior appointees are experienced teachers and lecturers who work with SQA to produce the course reports and highlight examples where candidates have performed well in their external assessments.
The reports also contain advice for teachers, lecturers, and training practitioners on preparing learners for the coming year’s assessments, as well as statistical data relating to grade boundaries.
The First Minister has set out his ambitions for Scotland’s economy during a speech in Glasgow.
Speaking at the Barclays Campus in Glasgow’s financial district on Friday, First Minister John Swinney outlined his government’s approach to economic policy making.
Mr Swinney said poor decision-making at UK level, typified by Brexit and immigration policy, means the Scottish Government must work even harder with its limited powers to help businesses and workers thrive.
The First Minister stated his determination to bring hope and optimism and said he will “go all out” to encourage economic investment.
John Swinney said policy making will be governed by:
Moderate left of centre, progressive values
A partnership approach with unions and business
A focus on actions
Problem solving based on evidence
The First Minister will highlight significant announcements in Scotland’s renewable energy sector this week and actions the Scottish Government is taking to boost high growth businesses.
The First Minister said: “My goal is to help people live happier and healthier lives with higher living standards and to help businesses boost profitability.
“The evidence shows that independent countries that are comparable to Scotland are wealthier and fairer than the UK.
“Scotland has the talents and resources to match that performance with independence but in the here and now and in the face of Brexit we must work even harder to help Scotland’s economy with the powers we have.
“I will go all out to encourage investment in Scotland and I will ensure people know my government is a firmly pro-business administration.
“A partnership with trade unions and business will be at the core of my approach and through that approach and given our resources, not least incredible renewable energy, we should look to the future with hope and optimism.”
ANALYSIS: FRASER of ALLANDER INSTITUTE
New FM – new approach on the economy?
Today, the new First Minister John Swinney set out his broad economic aspirations for Scotland (write MAIRI SPOWAGE and EMMA CONGREVE).
In a speech at the impressive Barclays Glasgow Campus (which he said embodied the ambition he wished to have for the economy), he set out the vision he had for Scotland to have a strong, successful, innovative and dynamic economy.
For people who were after specific policy actions, the speech was light on detail, but it was not perhaps fair to expect the FM to outline these sorts of specifics in a speech like this.
The FM also had a difficult line to tread, given (as he himself pointed out) that he has been a Minister in government for 16 of the last 17 years and wanted to talk about successes in a record he is “immensely proud of”. At the same time, he needed to recognise that there were failings in the previous administration that had led to him being in office as First Minister.
Economic Growth is front and centre
The First Minister had said as he took office that eradicating child poverty was his key policy objective. This morning he was keen to set out that there is no conflict between eradicating child poverty and boosting economic growth – rather, they go hand in hand. He set out that boosting the economy will create opportunities for people and raise living standards and that reducing poverty raises spending power and boosts productivity. This is to a large degree true, but there will at times be trade-offs that will require one to be prioritised over the other.
Given the key stakeholders from businesses and business organisations in the room for his speech today, he was very keen to set out that his government was going to work collaboratively with businesses and other organisations to design and implement policies to strengthen the economy. Even more broadly, the FM said that he wished to bring more consensus building back into Scottish politics to try to achieve outcomes – to “build up, not tear down” as he put it.
There was a clear “Scotland is open for business” from the FM today. Supporting more investment in Scotland (particularly related to the Energy Transition and Housing) is clearly a priority for this new administration. This featured heavily in this speech and has been supported by some of the policy announcements made earlier this week.
We will do, rather than write strategy documents
A widely welcomed aspect of the speech is likely to be the FM’s acknowledgment that his government could probably do with carrying out “more concrete actions and fewer strategy documents”.
We have been on record a number of times as saying that the Scottish Government produces too many and too weighty strategy documents. So this is a crowd pleaser to a room of people who are likely to want to see action rather than just warm words and have seen endless strategies come and go.
However, it is important to remember what the problem sometimes was with these documents. Sometimes, in the case of recent economic strategy documents, the problem is that they aren’t really strategies – if they set out high-level principles that no one can disagree with, but don’t provide a meaningful framework for prioritisation and dealing with trade-offs, then they aren’t particularly useful.
In other cases, even where strategies are set, they can often gather dust on a shelf rather than meaningfully drive activity in government.
All of this from the FM is likely to be broadly welcomed – it’s an easy sell to say there will be less bureaucracy. But let’s not forget that we still need a clear economic strategy from the FM and the DFM – and that a strategy is not a strategy unless it rules some things out and recognises trade-offs and carries through into day-to-day activity. This clarity and policy stability is what is likely to be required to inspire the confidence in investors that this new administration would like to see.
Looking forward, not back
Many of the questions from journalists in the room today were designed to get the FM’s views on what went wrong with economic policy under the previous leadership, In addition, he was asked what his government was likely to do on policies like rent controls, short term lets legislation, and tax increases (specifically income tax) that have been put in place at the past budgets. Essentially, people were keen to hear what, in these specific areas, might change under a John Swinney government.
The FM said clearly that he was “looking forward, not back” in response to the question about what went wrong under Humza Yousaf.
With regards to specific policies where regulation was impacting businesses, he said his Cabinet colleagues were looking at lots of areas of policy and that more details on specific policies would be following in the weeks and months to come.
On tax, he was more forthcoming – acknowledging that the higher tax rates on above-median earners in Scotland are an important component of raising revenue in straitened fiscal times, but also saying that “we can’t keep raising taxes”. It will be interesting to see how this approach to tax is reflected in the Government’s Draft Tax Strategy, which is due alongside the Medium Term Financial Strategy (date currently tbc). That is if these two documents survive the cull of strategies …
Evidence-based approaches
The FM today said a number of times that the government he leads will be more practical and will be driven by the evidence of “what works”. We are very supportive of this, of course, and hope it signals a shift of more meaningful appraisal and assessment of policy options within the Scottish Government, with the associated investment in evaluation.
In doing this, unintended consequences, whether economic or otherwise, are more likely to be identified and can be proactively mitigated, and/or it can allow the government to change course at an earlier stage.
In addition, progress and continuous improvement can only happen in a culture of meaningful evaluation and being prepared to learn from what worked and what didn’t work.
For example, how well has the policy on rent freezes and caps worked to date? It would initially appear from rental costs that it has had the opposite effect on rents than the government presumably desired, and it would also appear to have had an impact on investor confidence in the sector. Given the FM’s focus on housing in his speech today, and his commitment to be evidence-based, it will be interesting to see how this policy area progresses.
Is this a meaningful shift in approach?
With his speech today, that is certainly what the FM is trying to convey. He was saying many of the right things to hearten those who want to see the government focus on economic growth.
However, the proof will be in the policy action that is actually taken. So, let’s wait for these details in the weeks to come.
UK is only country in G7 where household budgets have not recovered to pre-pandemic levels
Families would be £750 a year better off if real disposable income had grown in line with other leading economies
Working people are being made poorer by Conservative failure, union body says
The UK is suffering the worst decline in living standards of any G7 country – according to new TUC analysis published this week.
The analysis shows the UK is only G7 economy where real household disposable income per head hasn’t recovered to its pre-pandemic levels:
Real household disposable incomes in the UK were 1.2% lower in the second quarter of 2023 than at the end of 2019.
But over the same period they grew by 3.5%, on average, across the G7.
The TUC estimates that if real disposable income in the UK had risen in line with the G7 average UK families would be £750 a year better off.
More pain ahead
The union body warned that the contraction in UK household budgets is going to get worse – despite falling inflation.
The Office for Budget Responsibility (OBR) forecasts that real house disposable income per head in Britain will fall by an additional 3.4% by the end of the first quarter of 2024.
And according to the same forecasts household budgets won’t even recover to their pre-pandemic levels until the end of 2026.
The OBR said in November that UK households are suffering the worst period for living standards since modern records began in the 1950s.
Households in debt
The TUC says the Conservatives’ failure to grow the economy and deliver healthy wage growth has pushed many households further into debt.
Analysis published by the union body at the end of December revealed that unsecured debt (credit cards, loans, hire purchase agreements) is set to rise by £1,400 per household, in real terms, this year.
The TUC says working people have been left brutally exposed to rising costs after years of pay stagnation.
UK workers are on course for two decades of lost living standards with real wages not forecast to recover to their 2008 level until 2028.
The TUC estimates that the average worker has lost £14,800 since 2008 as a result of their pay not keeping up with pre-global financial crisis real wage trends.
TUC General Secretary Paul Nowak said: “The UK is the only G7 nation where living standards are worse than before the pandemic.
“While families in other countries have seen their incomes recover – household budgets here continue to shrink.
“This is a damning indictment on the Conservatives’ economic record.
“Their failure to deliver decent growth and living standards over the last 13 years has left millions exposed to skyrocketing bills – and is pushing many deeper into debt.
“We can’t go on like this. Britain cannot afford the Tories for a day longer.”
Growth in real disposable household income in the G7
Country
change 2019Q4 to 2023Q2
United Kingdom
-1.2
Italy
0.1
Germany
0.2
Japan *
0.5
France
2.4
Canada
3.0
G7
3.5
United States
6.0
source: OECD; * Japan to 2022Q1
– The analysis is based on OECD figures for real household disposable income per head, which extend to 2023Q2 (except for Japan, which go to 2022Q1). Looking forward, UK figures are based on Office for Budget Responsibility projections in the November 2023 Economic and Fiscal Outlook. As with the ONS outturns and OBR projections, cash figures are in 2019 prices.
– The OBR measure living standards as real household disposable income (RDHI) per person.
The proposals in the UK Government’s Back to Work Plan contain a confusing mixture of devolved and reserved responsibilities, which leave us slightly mystified as to exactly how this is all going to work in practice (writes Fraser of Allander Institute’s MAIRI SPOWAGE):
In his speech, the Chancellor said: “… last week I announced our Back to Work Plan. We will reform the Fit Note process so that treatment rather than time off work becomes the default.
“We will reform the Work Capability Assessment to reflect greater flexibility and availability of home working after the pandemic. And we will spend £1.3 billion over the next five years to help nearly 700,000 people with health conditions find jobs.
“Over 180,000 more people will be helped through the Universal Support Programme and nearly 500,000 more people will be offered treatment for mental health conditions and employment support.
“Over the forecast period, the OBR judge these measures will more than halve the net flow of people who are signed off work with no work search requirements. At the same time, we will provide a further £1.3 billion of funding to offer extra help to the 300,000 people who have been unemployed for over a year without having sickness or a disability.
“But we will ask for something in return. If after 18 months of intensive support jobseekers have not found a job, we will roll out a programme requiring them to take part in a mandatory work placement to increase their skills and improve their employability. And if they choose not to engage with the work search process for six months, we will close their case and stop their benefits.”
These changes have the potential to impact recipients of Universal Credit. The complication is that UC is reserved, while many elements of employment support – the “extra help” that the Chancellor talks about – is, on the whole, devolved.
Because of this, many of the support mechanisms to help people avoid sanctions in England (& Wales in most cases) generated Barnett consequentials, including:
Restart: expand eligibility and extend the scheme for two years
Mandatory Work Placements: phased rollout
Universal Support: increase to 100,000 starts per year
Talking Therapies: expand access and increase provision
Individual Placement and Support (IPS): expand access
Sanctions: closing claims for disengaged claimants & end of scheme review
Fit Note Reform trial
So, in summary, it looks like the sanctions could be applied in a reserved benefit, following support that may or may not be provided by the Scottish devolved employability system as the Scottish Government could choose to spend the money on something else.
We wait for more details from both the UK & Scottish Governments about how this is going to work in practice.
• The real pay crisis is intensified and now expected to last 20 years. • The politically charged National Insurance cut makes the smallest dent in the worse squeeze on household incomes since the 1950s. • While the Chancellor has enjoyed higher revenues, he has chosen to play austerity politics rather than back public services on the brink – £20 billion has been taken from public services to fund the meagre tax cut. • An ‘Autumn Budget for growth’ has meant the reduced growth in almost every year of the forecast. • ‘Full expensing’ of capital expenditure is a seriously inefficient way to boost the economy. • In spite of all the claims to the contrary, the Tories are still presiding over worst deterioration in public finances for more than 100 years.
Real wage and household disposable income crisis unended
The forecasts published alongside the statement by the Office for Budget Responsibility (OBR) contained alarming news on real wages. According to the OBR forecasts, real wages are now not set to return to 2008 levels until 2028. The current pay squeeze will hit two decades.
This is a significant downgrade on the March forecast, when wages were returning to 2008 levels by 2026 – two years sooner than it now expects.
The forecast for broader living standards (as measured by real household disposable income per person) remains dire. After already declining in both the 2020/21 and 2022/23 financial years, further falls are expected over the next two.
While in fact a less bad forecast than March, the OBR stress that living standards “are forecast to be 3½ per cent lower in 2024-25 than their pre-pandemic level … this … represents the largest reduction in real living standards since ONS [Office for National Statistics] records began in the 1950s”.
The OBR also put into perspective the 2 per cent cut in National Insurance, reckoning it will boost living standards by around 0.5 per cent at the end of the forecast. This is a minor dent in an immense collapse, and of course as everybody has pointed out only reverses in a small way tax increases at past statements – even on their own terms the government are failing.
Minimum wage
Specifically for those on the minimum wage, the Chancellor has accepted the recommendations of the Low Pay Commission (LPC). This takes the wage floor to £11.44 an hour and extends coverage to everyone aged 21+. This is badly needed and follows pressure from unions and low-pay campaigners. But with prices sky high, and the OBR increasing its inflation forecasts, the minimum wage must be raised to £15 as soon as possible, and extended to all adult workers.
The Low Pay Commission’s recommendations take the minimum wage to 66% of median wages. This is an internationally recognised measure of relative low pay. However, the Chancellor’s claims that he has eliminated low pay should be taken with a pinch of salt. This is a measure of pay distribution which looks at how close low-paid workers are to the median worker. The floor has risen since 2010 but the middle has had no real pay rise over 13 years. The bottom has been catching up, in part, because wages are stagnant for everyone else. The government should set the LPC’s next minimum wage target at 75% of median wages, and this should be delivered alongside a plan for real wage growth for all workers.
Unemployment rise
The OBR has also predicted that unemployment will steadily rise from now until midway through 2025, estimating there will be 275,000 more people in unemployment than at the start of this year. At no point in the OBR forecasts do they predict unemployment will fall below the level at the start of the year.
It is unfair to put it mildly to penalise individuals for an economic climate which is out of their control. The Chancellor decided to support compulsory work placements, but analysis show this punitive policy does not result in an improved employment outcome.
Skills
The Government plans focus largely on reforms coming in for 16-18 year olds, overlooking the skills gap faced by those already in the labour market. On apprenticeships £50m for a 2-year pilot widely misses the mark. In 2021/22, there were approximately 349,200 apprenticeship starts in England – a 31% decline from the pre-Apprenticeship Levy figures of 509,400 starts in 2015/16 (Source: CIPD). The funds are largely directed at male-dominated sectors, according to the Women’s Budget Group. Other measures are recycled and/or small – though the increase to the pitifully low apprenticeship minimum wage is be welcomed.
Little has been done to reverse cuts to adult and further education budgets since 2010, with spending still significantly below where it was when the government took office. Celebrating an uptick in Level 4 apprenticeships just repeats the ‘virtuous cycle’ where those with the highest levels of qualification receive the most investment in their training. Graduates get most of the training as working adults, and almost half of adults from the lowest socio-economic group receive no training at all after leaving school.
Social security
It is a low bar for this Government when they boast that benefits are being uprated in line with September’s rate of inflation, which is standard practice. Though they have severed the link between inflation and the uprating of benefits numerous times since 2010 – which has slashed vital financial support for families.
And while the Local Housing Allowance has been restored to the 30th percentile after it was last frozen in 2020, it will be frozen again and support reduced for ever-increasing rental prices.
There were also significant cuts to benefit entitlements for some people with long term health conditions. They are expected to lose £400 a month compared to current system, and face the threat of sanctions to enter employment.
The rate at which prices are increasing may have slowed, but families are still struggling with the essentials. Over the last two years the cost of energy has increased by 49 percent while food prices have increased by 28 percent.
Energy prices
And energy bills are a glaring omission from this Autumn Statement.
Household energy bills remain 50% higher than they were in the winter of 2021-2022 (approximately £600 higher for an average household). This means that an estimated 6.3 million households are in fuel poverty (spending more than 10% of their income on energy), and more than 1 million households are in extreme fuel poverty (spending 20% or more of their income on energy). (Estimate by Friends of the Earth and National Energy Action as government data are not yet available.)
Energy prices are expected to remain high or increase. Ofgem today raised the domestic energy price cap by 5%, based on wholesale price volatility.
Many employers will also struggle with rising and volatile energy bills. The UK consistently has some of the highest electricity prices for business in Europe, affecting the ability of UK manufacturers to compete internationally. Unions representing manufacturing workers have consistently campaigned alongside employer bodies for measures to rein in excessive and volatile wholesale energy prices – but these issues seem to be far from the list of priorities of the current Government.
Public services and public finances crises continue
As the OBR gently warn, “it is worth dwelling for a moment on something the Chancellor didn’t announce in his Autumn Statement – which is any major change to departmental spending plans despite significantly higher inflation”.
The government has added “just” £5 billion a year in cash terms to departmental budgets, and this means that “the real spending power of these budgets is eroded by around £19 billion” relative to the previous forecast (as on their chart below).
In 2023-24 the increased budget is allocated for public sector pay increases (£3.9 billion for the NHS in 2023-24, and £0.4 and £1.4 billion for other departments in 2023-24 and 2024-25, respectively). Overall, the OBR have departmental spending growing by 0.9 per cent a year in real terms, down from 1.1 per cent at the March Budget.
Given the government’s political priorities on spending, the OBR stress that unprotected departmental spending is projected to fall by between 2.3 and 4.1 per cent a year in real terms from 2025-26. They wryly observe this (austerity) would “present challenges” and cite the Institute for Government’s recent report finding that “performance in eight out of nine major public services has declined since 2010”. Plainly there is no intention to resolve the crisis in public services and public service recruitment. And ultimately
The public finances overall
For the public finances as a whole, the government has enjoyed a momentary windfall – with less bad than expected growth outturn and higher inflation meaning tax gains (especially with tax thresholds not being uprated) outweighing higher interest and other costs. This has been spent on the NI cut and expensing.
But the Chancellor has made hollow boasts about the improved condition of the public finances. The overall management of the economy for 13 years has meant a disastrous failure for them. Immediately less bad GDP outcomes (next section) have meant marginally improved ratios for this statement. But overall the Conservatives have presided over a huge increase in debt from 65 per cent of GDP in 2009-10 to 98 per cent of GDP in the current financial year. This is an unprecedented deterioration relative to all economic cycles for more than a century.
Growth crisis unended
At the end of his speech the chancellor proclaimed an “Autumn Statement for Growth”. But nothing announced yesterday changed the bottom line. While the forecasts reflected ONS revisions to GDP data and a less bad than expected 2022, growth over the next two years is revised steeply down. And on a medium term view the OBR warn:
“we have revised DOWN our estimate of the medium-term potential GROWTH rate of the economy to 1.6 per cent, from 1.8 per cent in March” (our emphasis)
Of the onslaught in policy measures, the most prominent was making permanent the full expensing of business capital investment. The Chancellor chose to disregard OBR analysis showing both precursor measures (the super-deduction and temporary full expensing in the March 2021 and March 2023 Budgets) had a lower impact on investment levels than predicted (see OBR, Economic and Fiscal Outlook, November 2023, pp 33 – 34).
Introducing full expensing is forecast by the OBR to lead to an increase in business investment of £14 billion between now and 2028-29 and to cost £29.5 bn over the same period. This would appear then to be an extremely inefficient means of increasing business investment, reflecting huge ‘deadweight’ effects, whereby businesses gain generous tax relief on investment that would (likely) have taken place anyway.
The OBR estimates that the measure will raise the capital stock by 0.2 per cent by 2028-29 – a positive, but small, and very costly impact.
Pension saving
The chancellor also had high hopes for the role workers’ £2.5tn of pension savings could play in boosting our flagging economy. But while there were some welcome steps such as setting up a new growth fund through the British Business Bank the plans rely mostly on merging pension schemes in ways that are unlikely to be in the interests of their members, and leaning on funds to put more money into global private equity. These measures were also over shadowed by a poorly thought through proposal to upend the workplace pension system. See our fuller commentary here.
Industrial strategy?
As the Chancellor noted, the lack of long-term certainty over policy decisions (including industrial strategy, taxes, and climate commitments) is a drawback to business decisions to invest. But there was no reassurance in the Autumn Statement that the Government would provide that certainty. While reannouncements of investment commitments to support the automotive, advanced manufacturing, and energy sectors – amounting to £4.5 billion are welcome, this represents only a small proportion of the investment requirements of the Biden-style industrial strategy that the UK needs.
Ending the failure
The failure – as Labour have repeatedly identified – is still a failure of growth. The government need to invest in a stronger economy where growth and fairness go hand in hand, where decent pay means workers spend and businesses produce to meet that spending. A virtuous cycle comes when businesses invest in the face of expansion and optimism, and stronger public services re-enforce the upward dynamic. Fairer and sustainable growth will then support the public finances.
Yet the government continues to take us in the wrong direction. Yesterday’s Autumn Statement showed more strongly than ever why it is time for a change.
Autumn Statement ‘ushers in new era of welfare reform’
A ‘bold new vision for welfare’ backed by nearly £30 billion has been set out by Work and Pensions Secretary Mel Stride
Millions of people will benefit from next generation of welfare reforms and extra support for those most in need, announced at Autumn Statement
Benefits increased by 6.7% and pensions by 8.5%, maintaining commitment to seeing the country through cost of living pressures
DWP Secretary Mel Stride heralds new era offering a “brighter future for millions”
The plans offer unprecedented employment and health support to help over a million people, while protecting those in most need from cost of living pressures – including raising pensions and benefits and increasing help with housing costs.
Long term decisions to provide unprecedented help for people to move off welfare and into work were at the heart of the Government’s plan for growth set out at the Autumn Statement.
While unemployment has been almost halved since 2010, the £2.5bn Back to Work plan will help thousands of people with disabilities, long-term health conditions and the long-term unemployed, to move into jobs. This comes alongside new guarantees for those on the highest tier of health benefits around keeping benefit support to cushion those who try work.
The transformative employment programme comes as the Government continues to protect the most vulnerable, delivering a Triple Lock-protected boost for pensioners and raising benefits in line with inflation next year, worth £20bn taken together.
The changes mean the full rate of the new State Pension will go up by £17.35 per week, while families on Universal Credit will be on average £470 better off next year.
Around 1.6 million households will also benefit from an increase to the Local Housing Allowance – and will be around £800 a year better off on average. Worth more than £7bn over five years, this commitment will support low-income families in the private rented sector with rent costs and help prevent homelessness.
Secretary of State for Work and Pensions, Mel Stride MP said: “Work changes lives. With the next generation of welfare reforms, we will help thousands of people to realise their aspirations and move off benefits into work, while continuing to support the most in need.
“We are taking long term decisions that will build a brighter future for millions, offering unprecedented support to open up opportunity and grow the economy, building on our record that has seen almost four million more people in work since 2010.
“Our reforms will remove the barriers to work that we know some people still face, while we’re boosting benefits and pensions to help with cost of living pressures.”
Welfare reforms announced at the Autumn Statement include:
Uprating working age benefits in line with September’s CPI index figure of 6.7%.
Uprating state pensions in line with September’s earnings figure of 8.5%.
Increasing the Local Housing Allowance to cover the 30TH percentile – worth an average of £830 per year.
Expanded jobcentre support including intensive help for those on Universal Credit
Introducing the Chance to Work Guarantee, which will tear down barriers to work for millions of claimants to try work with no fear of reassessment or losing their health benefit top-ups.
Increasing mental health support for jobseekers by expanding NHS Talking Therapies treatment and the Individual Placement and Support programme, supporting almost 500,000 over five years.
Matching 100,000 people per year with existing vacancies and supporting them in that role through Universal Support.
Rolling out WorkWell to support people at risk of falling into long-term unemployment due to sickness or disability.
Reforming the Work Capability Assessment for new health benefit claimants to better reflect the opportunities available in the modern world of work.
Stricter sanctions for people who should be looking for work but aren’t engaging with jobcentre support.
Building on the Mansion House reforms with further steps to improve private pension returns and grow the economy.
Introducing new Government powers to request data from organisations such as banks when accounts are showing signals of fraud and error.
The Government’s ‘radical new plan’ will stem the flow people falling out of work and onto inactivity benefits due to physical or mental health problems, as it takes the long-term decisions to help people realise their dreams to find a job and build a better life.
With this unprecedented level of employment support comes tougher enforcement of sanctions for fit and able people who should be looking for work but aren’t.
Work coaches will use tools to track people’s attendance at jobs fairs and interviews, and close benefit claims of those able to work who have been sanctioned and no longer receiving money after six months.
Taken together, the package will make sure those who are vulnerable or on the lowest incomes are protected, with intensive support to get them back into work, while ensuring fairness to the taxpayer.
A study to gather vital data on COVID-19 this winter has been launched by the UK Health Security Agency (UKHSA) and the Office for National Statistics (ONS).
The Winter COVID-19 Infection Study (WCIS) will run from November 2023 to March 2024, involving up to 200,000 participants.
UKHSA previously commissioned the Coronavirus Infection Survey (CIS), carried out by the ONS during the pandemic, in partnership with scientific study leads Oxford University.
Recognised globally as the gold standard for surveillance of the virus, CIS gathered and analysed more than 11.5 million swab tests and 3 million blood tests from April 2020 to March 2023.
The new WCIS is a different study and will involve up to 32,000 lateral flow tests being carried out each week, providing key insight into the levels of COVID-19 circulating across the wider community. This sample will be broadly representative of the population according to key characteristics.
While widespread vaccination has allowed us to live with COVID-19, some people remain more vulnerable to severe illness, and this in turn can lead to increased pressures on the NHS over the winter months.
That is why UKHSA is urging eligible adults to book their flu and COVID-19 vaccines online via the NHS website, by downloading the NHS App, or by calling 119 for free, to give themselves the best protection against severe illness and hospitalisation.
UKHSA’s existing surveillance systems already provide up-to-date information on hospital and intensive care unit (ICU) admission rates, but the introduction of this study will allow us to detect changes in the infection hospitalisation rate (IHR), which requires accurate measurement of infection levels in the community.
Calculating the IHR will enable UKHSA to assess the potential for increased demand on health services due to changes in the way the virus is spreading, which could be driven by the arrival of any new variants.
Professor Steven Riley, Director General of Data, Analytics and Surveillance at UKHSA, said: “The data we collected alongside the ONS during the pandemic provided us with a huge amount of valuable insight, so I am delighted that we are able to work together again to keep policymakers and the wider public informed in the coming months.
“UKHSA continues to lead the way internationally on COVID-19 surveillance and by re-introducing a study of positivity in the community, we can better detect changes in the behaviour of the virus.”
The study will use lateral flow devices (LFDs) supplied by UKHSA.
The latest UKHSA technical briefing, published on 22 September, included initial findings of tests performed in the laboratory at Porton Down to examine the effectiveness of LFDs in detecting BA.2.86, and found no reduction in sensitivity compared to previous variants.
The model and scale of this study could also be converted into a programme that captures data on different respiratory viruses, should that be required in future.
Deputy National Statistician Emma Rourke at the ONS said: “ONS is committed to building on the experience of standing up the gold standard CIS. Our resources and statistical expertise are here for the public good, and we are delighted to be delivering this study in partnership with UKHSA.
“There remains a need for robust data to help us continue to understand the virus and its effects during the winter months.
“As well as working to provide UKHSA with regular rates of positivity, we will also be looking at analysis of symptoms, risk factors and the impact of respiratory infections, including long COVID, as part of this important surveillance.”
The first results of the Scottish Census which took place in March 2022 have been released today, which show that the Scottish population has increased by 2.7% since the last Census in 2011 (write Fraser of Allander Institute’s MAIRI SPOWAGE and JOAO SOUSA).
Digging underneath this, there were 585,000 births and 634,800 deaths since the 2011 Census. So, without migration, the Scottish population would have decreased by 49,800. Net migration of +191,000 people is the reason that we have seen this population growth in Scotland.
The Census shows that the population in Scotland grew less quickly than England and Wales (+6.3%) and Northern Ireland (+5.1%).
The main story is of an ageing population
The numbers show a significant increase in the share of the population that is over the age of 65. 1 in 5 people were aged 65 or over in 2022; it was only 1 in 8 in 1971 and 1 in 6 in 2011.
The larger share of older people is largely a good news story, reflecting the success in increasing life expectancy over the long run. But fewer children are also being born.
So not only is today’s share of the population over the age 65 larger than ever before, it will continue to grow in the coming decades (even with the levels of inward net migration seen over the last decade or so).
Chart: Dependency ratios at successive Scottish Census
Source: National Records of Scotland, FAI calculations
This means that the working age population – which produces most economic output and pays the largest share of the taxes that fund public services – will need to support a larger share of the population than in previous decades.
Older people generally also need to rely on health and social care more, which increases funding pressures on public services, and increases the number of people entitled to claim state pension – bringing into focus the cost over the long term of policies such as the triple lock.
This is not a Scottish-specific issue, or even a UK-specific one, but it is one the country will need to grapple with. As the Office for Budget Responsibility and the Scottish Fiscal Commission’s recent analysis showed, if these spending pressures were to be accommodated, it would mean an unsustainable path for the public finances, which would have to be addressed by either tax increases, spending reductions, or (most likely) a combination of the two.
The population is also moving within Scotland
The published results also provide an up-to-date picture of population counts and structure across council areas – and the 2.7% increase in national population has not been equal across the board.
Areas around Edinburgh showed the strongest increases, with Midlothian (16.1%), East Lothian (12.6%) and Edinburgh City itself (7.6%) topping the list. At the other end of the scale, Na h-Eileanan Siar (-5.5%), Inverclyde (-3.8%) and Dumfries and Galloway (-3.6%) showed the sharpest declines. In total, 22 of the 32 council areas showed an increase in population.
These changes in population have also led to changes in the structure of the population in different council areas. The four areas with the largest proportional increase in the share of over 65s (Shetland, Aberdeenshire, Clackmannanshire, Highland) are all lower population density than the national average, which itself is a long way below that of the large urban centres. All four also saw falls in the share of the working age population of 5% or more.
By contrast, Glasgow City saw its share of the working age population increase by 0.6%, and Edinburgh City’s decreased by only 1.6%, well under the average decline across Scotland of 3.7%.
These results serve as an illustration of the difficulties faced by more rural areas of Scotland in attracting people of working age relative to large urban areas, and the disparate effects of an ageing population on different areas of the country.
Are the Census results reliable?
There has been considerable coverage of the approach to the Scottish Census given the challenges that were faced in ensuring a good return rate in order to have as good quality as possible.
National Records of Scotland had to extend the deadline to allow households more time to get the forms in, and ended up with a return rate of 90%, compared to the 94% that they achieved in the 2011 Census. This also compares rather unfavourably to the (admittedly very good) response rate in England and Wales in 2021 of 97% (in 2011, the E&W return rate was also 94%).
So why was the return rate lower than it had been in the past?
For anyone who doesn’t remember, in July 2020, about 9 months before the Scottish Census originally scheduled for 2021 was supposed to take place, National Records of Scotland decided that they would delay the Scottish Census for a year due to “the impact of the Covid pandemic”.
The ONS and NISRA, who are responsible for the Census in England and Wales and Northern Ireland respectively, took a different view and proceeded with their census on the original planned date.
At the time, there was concern about the impact that this delay could have on the coherence of the census data across the UK, and the potential (for ever more) for this incoherence to weaken the power that the Census has to provide a snapshot of the UK population. This is particularly true for the groups that are only really reached well in a full population census – small and underrepresented groups, for example.
However, there is no doubt that this delay had an impact on the return rate for the Scottish Census, perhaps due to the lack of benefit that would have been accrued from the coverage and publicity of the UK-wide census going on at the same time.
Having said that, use of a coverage survey and the additional data sources used to supplement the gaps caused by non-returns is not unusual. Even at 94% coverage, these techniques would be used to ensure that the whole population is reflected in the counts. This is not, in itself, a reason to question the validity of the Census results.
However, the lower response rate does mean more of this is required from these results. And in some places in the country with particularly low return rates, such as Glasgow, it does make the results more uncertain.
National Records of Scotland have assessed the overall margins of error at the Scotland level is similar to 2011: but no doubt will be doing more assessment over the next year(s) on how the lower return rate could affect particular groups or geographies.
TUC General Secretary Paul Nowak declares “now is the time to start a national conversation about taxing wealth”
The TUC has called for a national conversation on taxing wealth, as it publishes new analysis which shows a modest wealth tax on the richest 140,000 individuals – which is around 0.3% of the UK population – could deliver a £10.4 bn boost for the public purse.
The analysis sets out options for taxing the small number of individuals with wealth over £3 million, £5 million and £10 million, excluding pensions.
The TUC says these options are illustrative examples of what a wealth tax could look like, using Spain’s existing policy as a potential model.
“It’s time for a national conversation”
The TUC says it is publishing the analysis to “kickstart a conversation” about tax – with the TUC general secretary Paul Nowak declaring “now is the time to start a national conversation about taxing wealth”.
According to analysis commissioned by the TUC, conducted by Landman Economics, a cumulative one-off wealth tax (excluding pensions wealth) on:
A wealth threshold of £3 million with a marginal tax rate of 1.7% would yield £2.7 billion (with the tax payable on wealth above £3 million by 142,000 individuals or 0.27% of adults in the UK)
A further wealth threshold of £5 million with a marginal tax rate of 2.1% would yield an additional £3.2 billion (with the tax payable on wealth above £5 million by 48,000 individuals or 0.09% of adults in the UK)
A further wealth threshold of £10 million with a marginal tax rate of 3.5 % would yield an additional £4.6 billion (with the tax payable on wealth above £10 million by 17,000 individuals or 0.02% of adults in the UK).
Together this could raise more than £10 billion for the exchequer.
The tax would apply as a marginal rate on wealth and assets above each threshold – in the same way income tax works. For example:
Someone with £3 million wealth would pay nothing.
Someone with £4m wealth would pay tax on £1m of their wealth – paying £17,000.
Someone with £9m would pay tax on £6m of their wealth – paying £118,000
Analysis reveals that of those with wealth over £3 million (excluding pensions), three quarters derives from wealth other than their primary residence, and over half comes from financial wealth:
Net financial (non-pension) wealth: 53.3%
Primary residence: 23.6%
Other residences: 18.7%
Physical wealth: 4.4%
The TUC says further debate is needed on what type of wealth is included in this kind of tax.
The union body has already called on the government to equalise capital gains tax with income tax which could raise around £14 billion.
The union body says it is inherently “unfair and unjust” that people who get income from assets or property get off more lightly than someone who relies on work.
Tale of two Britains
The TUC says increasing wealth inequality is resulting in a “tale of two Britains”.
While working people have been “hit by a pay loss of historic proportions” after the longest wage squeeze in modern history, the wealth of multimillionaires and billionaires has boomed.
Financial wealth over the decade from 2008-10 to 2018-20 increased by around £0.9tn (80 per cent) from £1.1tn to £1.9tn.
TUC General Secretary Paul Nowak said: “It’s time to start a national conversation about how we tax wealth in this country.
“It is absurd that a nurse pays a bigger share of their income in tax than a city trader does on profits from their investment portfolio.
“That’s not only fundamentally unfair and unjust – it’s bad for our economy too.
“Our broken tax system means those at the top are hoarding wealth and getting richer and richer, while working people struggle to get by.
“That is starving our economy of spending – as it’s working people who spend their money on our high streets – and it’s starving our public services of much-needed funds.
“This research sets out potential options for getting those with the broadest shoulders to pay a fairer share.
“This is a debate we should not be afraid of having. The Chancellor should use his autumn statement to make sure the wealthiest pay their fair share of tax.”
Commenting on widening inequality over the past decade, Paul added: “Widening wealth inequality means we are seeing a tale of two Britains.
“While working people are suffering the longest pay squeeze in modern history, the super-rich are coining it in.
“Porsche sales are at record highs, bankers’ bonuses are at eyewatering levels, and CEO pay is surging.
“Enough is enough. We need an economy that rewards work – not just wealth.
“Fair tax must play a central role in rewiring our economy to work for working people.”
Renewed downturn in permanent placements during October
Permanent placements fall amid growing economic uncertainty
Temp billings decline for first time in 26 months
Pay pressures soften, but remain strong overall
Hiring activity across Scotland fell into decline during October, with both permanent staff appointments and temporary billings contracting, according to the latest Royal Bank of Scotland Report on Jobs survey.
Permanent placements have now fallen in two of the past three months, while the downturn in temp billings was the first seen since August 2020. Moreover, the rates of contraction were strong overall amid reports of growing economic uncertainty, softening demand conditions and the deepening cost of living crisis.
October data also revealed further increases in starting salaries and temp wages. However, rates of inflation continued to ease, signalling a mild waning of pressure on pay.
Permanent staff placements fall solidly
October data highlighted a fall in permanent staff placements across Scotland. After a month of growth in September, the respective seasonally adjusted index reverted below the neutral 50.0 threshold to signal the second reduction in three months.
The rate of contraction was the fastest seen in nearly two years and solid, with recruiters often linking the fall to growing economic uncertainty and the cost of living crisis.
At the UK level, a fall in permanent staff hires was also noted, with the rate of decline similar to that seen in Scotland.
Scottish recruitment consultancies signalled a reduction in temp billings during October, thereby ending a 25-month run of expansion. The rate of contraction was the quickest seen since July 2020 during the initial wave of the pandemic and strong overall. According to panellists, the latest fall was driven by reduced activity at clients.
Across the UK as a whole, temp billings were broadly stagnant after rising in each of the prior 26 months.
Downturn in permanent staff supply fastest in three months
Recruiters across Scotland noted a twenty-first successive monthly fall in permanent candidate availability during October. The pace of decline quickened on the month and was marked overall. Panellists generally linked the latest downturn to skill shortages and increased hesitancy to seek out new roles due to rising economic uncertainty.
The pace of reduction across Scotland was more rapid than that recorded for the UK as a whole.
The supply of temp labour across Scotland fell again during October. Despite being severe overall, the rate of decline was the second-slowest in seven months (after September). Recruiters highlighted a lack of European workers and ongoing skill shortages as factors constraining supply.
As has been the case for the last seven months, the rate of contraction in temp staff availability in Scotland was sharper than that seen at the UK level.
Starting salary inflation softens further in October
Latest survey data indicated that average starting salaries for permanent staff in Scotland increased at the slowest pace since June 2021 during October. That said, the pace of wage inflation remained elevated in comparison to the historical average. According to anecdotal evidence, skill and candidate shortages continued to drive up rates of pay.
Data for the UK as a whole also signalled a softer rise in starting salaries during October. Moreover, the pace of inflation was softer than that seen for Scotland for the first time in four months.
As has been the case for the past 23 months, temp wages rose across Scotland during October. While the respective seasonally adjusted index hit an 18-month low, it signalled a sharp rise overall. Greater competition for scarce candidates was cited as a key driver of the latest increase in temp pay.
At the national level, wages also increased at a much slower rate during October. However, the rate of inflation was quicker than that registered in Scotland.
Demand for permanent staff expands at slowest pace in 20 months
Demand for permanent staff grew sharply during October, thereby extending the current period of expansion to 21 months. However, the respective seasonally adjusted index fell for the sixth month running, with the latest reading edging down to a 20-month low.
Across the monitored job categories, IT & Computing registered the steepest rate of expansion, followed by Nursing/Medical/Care.
Recruiters across Scotland noted a twenty-fifth successive monthly rise in temp staff demand during October. While the rate of growth was the weakest since February 2021, it was quicker than that seen across the UK as a whole.
At the sector level, IT & Computing saw the quickest growth in short-term vacancies, followed by Accounts & Financial.
Sebastian Burnside, Chief Economist at Royal Bank of Scotland, commented: “Labour market conditions across Scotland deteriorated in October, as for the first time since August 2020, both permanent placements and temporary billings contracted.
“At the same time, rates of vacancy growth for both permanent and short-term staff continued to ease. Candidate and skill shortages meanwhile stretched the supply of labour thin, with recruiters also noting that increased economic uncertainty had impacted candidate numbers. Though it does seem that market imbalances are becoming less pronounced, the effect on pay remains strong.
“The data therefore suggest that growing uncertainty about the economy and the cost of living crisis are already affecting the labour market, and could weigh further on hiring decisions for the remainder of the final quarter of 2022.”
