Although widely marketed as a “mini-budget”, the Chancellor’s fiscal statement today was anything but small. Encompassing policy changes ranging from £29 billion in support for employers during the energy crisis through to a swathe of tax cuts and benefit reforms, the measures signal a significant break from the policies of the Johnson administration.
But will they meet the dual aims of the Chancellor, Kwasi Kwarteng, to provide additional reassurance for employers on energy bills this winter, and kick start stronger economic growth across the country?
1. Cost of living measures – what did we see?
Following the support measures for households announced by the Prime Minister last week, today the Chancellor has provided more clarity on support available to businesses, charities and the public sector. This Energy Bill Relief Scheme will see bills frozen at £211 per megawatt hour for electricity and £75 per MWh for gas for six months.
Although this commitment to guarantee stability for employers’ energy costs is welcome, there remain two significant challenges. The first is that prices have already risen significantly, meaning many organisations still face having to deal with an increase in electricity bills of 349% from February 2021 according to the Federation of Small Businesses . The prevention of further rises is, of course, vital but the fact remains organisations of all shapes and sizes are going to be faced with much steeper bills than they had likely budgeted for.
Secondly, the support is time limited to six months – enough to get through the hardest winter months, but hardly long enough to help most organisations to take longer term financial and workforce decisions. Without that longer-term stability, we may see organisations decide to reduce their headcount or use more insecure forms of employment in any case, pre-empting the removal of support in 2023.
In sectors reliant on seasonal trade like retail and hospitality, there will already be significant concerns that we see a third Christmas with supressed demand. More clarity for ongoing support to vulnerable organisations and sectors of the economy will likely be needed before we enter the festive period.
For households, the large package of support announced earlier this month will still mean a sharp rise in bills. The welcome injection of funding in to the benefits system earlier this year was introduced before Government had a sight of the rising energy costs we’re now facing. There is a pressing need to look again at targeted measures for individuals on the lowest incomes, including bringing forward the planned uprating of Universal Credit to reflect the costs people are facing today.
2. A push for prosperity?
Today’s plan marks a departure with established tax and spend policy, with significant and comprehensive reforms to business and personal taxation. This includes the development of enterprise zones with lower taxes, reducing stamp duty paid on property purchases and the basic rate of income tax, while removing the top rate altogether, and cancelling planned rises to corporation tax and National Insurance contributions.
Badged as a strategy to boost business investment to facilitate economic growth, these measures represent a significant gamble. Former Chancellor Rishi Sunak previously said “It is unclear that cutting the headline corporation tax rate did lead to a step change in business investment. We need our future tax policy to be targeted and strategic.” Taken as a whole, these tax changes put the UK public finances on an unsustainable footing.
What’s more concerning is this morning’s plan doesn’t address major challenges within our labour market: low participation and insecure work.
3. Support for older workers to re-enter the labour market misses the mark
The Chancellor was right to underscore supply-side issues within the economy this morning. Employers have been struggling to recruit; for the first time there are more vacancies than unemployed people in the UK. The recent fall in unemployment is not a reflection of individuals competing for these roles, but rather has been driven by people leaving the labour market with a record number of people out of work and not looking for a job due to long-term illness or taking early retirement.
To address this, we have been calling for a comprehensive ‘plan for participation’, offering tailored employment support to all over 50s who would like to re-enter the labour market. Instead, today the Chancellor announced an undercooked plan aimed at getting older people back into involving increasing support from work coaches for over 50s receiving Universal Credit.
According to the latest ONS data, just 12.7% (505,412) of those who are economically inactive and aged 50-65 were on Universal Credit during April-June 2022. This means that there are close to 3.5 million people aged 50-65 who are inactive but not on Universal Credit, and therefore would not be eligible for employment support if they wanted to get back into work.
4. Putting more pressure on people getting Universal Credit will make this winter harder to manage
In a further attempt to boost labour supply, the Chancellor announced today that people who get Universal Credit while working will face new pressures to increase their earnings, and could face sanctions if they don’t. Replacing support previously offered through working tax credits, Universal Credit tops up earnings for thousands of workers across the country who whose earnings are too low to get by.
This support is essential for people who need to work part-time: disabled people, carers and parents in particular. The reality is many workers getting UC can’t increase their hours due to personal circumstances or because their employer hasn’t got more shifts to give. Recent research with employers has highlighted that requiring individuals to try and take on more work can “clash with business practices”; with some businesses unable to accommodate increasing hours for existing workers, and some using contractual clauses to prevent workers seeking second jobs with a competitor.
These changes may only affect a small additional number of those on Universal Credit (about 120,000 people out of about 5.5 million claiming the benefit) but the impact on those individuals could be significant. Requiring part-time workers to take on more hours won’t support people to enter and stay in work, but the threat of a sanction could cause real harm to households already struggling through the cost of living crisis. As we highlighted earlier in the year, we need long-term plans, not populist policies, to improve participation in the labour market.
Now is the time to break the link between welfare benefits and access to employment support, while increasing investment in specialist support for older workers, parents and disabled workers. It is critical that this support is rooted in local areas and delivered through specialist, trusted organisations who can provide a tailored service, and truly understand the challenges that older workers face in accessing and staying in work.
There are a range of welfare reforms that could make a positive difference to low paid workers, including extending work allowances to allow recipients to keep more financial support as they build up their earnings, or reducing the rate at which that support is withdrawn more generally.
And on the issue of part-time workers specifically, a far bigger priority should be to ensure Universal Credit works better for those whose earnings change week to week, or month to month. Greater flexibility over assessment periods and the frequency of UC payments would support workers whose earnings vary, including those on temporary contracts, contracts without guaranteed hours, or those working overtime
Instead more punitive welfare measures, and the hope that we see the benefits of tax cuts trickle down, will do nothing to ensure low income families have enough money to afford the essentials this winter, or move them into sustainable, well paid and secure employment in the future.
What happens next?
The measures announced by the Chancellor today contain some of the most significant tax changes in decades, and represent a clean break with the previous Conservative Government’s economic policies. Yet the measures presented on the labour market either fail to grapple with the reality of the challenge when it comes to economic activity, or will actively make things worse for those in poorly paid, part time and insecure employment.
Badging today’s statement as ‘mini’ might provide a fig leaf to explain why such a wide-ranging suite of measures are not accompanied by a new OBR forecast, nor subject to more extensive parliamentary scrutiny before recess. The reality is it sets a very poor precedent for interventions of this breadth and scale which merit significantly more scrutiny and analysis.
The true cumulative impact of these changes will become clearer in the weeks and months ahead. For now, it’s clear the Government is taking a big gamble with the economy, our public services and millions of people’s living standards.
At a minimum we need to see a new OBR forecast reflecting the potential impact of these measures brought forward later this Autumn – and the reality is we are also very likely to need further measures to support those most vulnerable to the cost of living crisis, and for whom tax cuts will do very little to help indeed.
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