ANALYSIS by TUC’s GEOFF TILY
• 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)
The worse growth performance for the UK economy in a century just got worse again.
“Full expensing”
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.
TORY GOVERNMENT OR TUC – WHO DO YOU BELIEVE ?
