Academics from City St George's, University of London comment on Rachel Reeves' first Budget as Chancellor of the Exchequer.
By City Press Office (City Press Office), Published
Rachel Reeves MP delivered her Autumn Budget on Wednesday 30 October. Ms Reeves, who gave the 2024 Mais Lecture at Bayes Business School in March, titled 'Economic Growth in an Age of Insecurity', set out the new Labour's Government's immediate economic priorities.
Amid revelations of a £40 billion 'black hole' in public finances, policies included increases to employer National Insurance contributions, capital gains tax hikes and cuts to VAT relief on private schools. The Budget also announced a £22.6 billion injection into the National Health Service and changes to the way the government measures debt to allow for more borrowing.
A Budget for productivity?
Professor André Spicer, Dean of Bayes Business School, says improving productivity needs to be top of Rachel Reeves' list,
"Before taking on the job, the Chancellor focused on the issue of improving productivity within the UK economy," he said.
"This makes sense as productivity has been flat for years and growing productivity is the major driver of improvements in living standards.
"The question, however, is where are the productivity-improving measures in this budget?
"Typically you address this by investing in technology, innovation, infrastructure, skills and management quality. Most of the measures announced do not address any of these issues."
Professor Steve Schifferes, Honorary Research Fellow in the School of Policy and Global Affairs believes Labour and the Chancellor risk incurring disillusionment of businesses and the public due to its pre-election commitments. Writing in The Conversation prior to the announcement, Professor Schifferes said:
"There are three ways that the government can raise the funds it needs to boost investment and improve key public services.
"It can raise taxes, increase borrowing, or make cuts to spending. Given the scale of the challenge faced by the chancellor, all three are likely.
"The government had made a rod for its own back with two of its key election pledges: not to raise the main taxes (income tax, national insurance, and VAT) on “working people”, while sticking to a set of fiscal rules that set strict limits on government borrowing."
"These pledges were designed to appeal to voters hit by the cost of living, while demonstrating to financial markets that Labour would be cautious with public money.
"Given the scale of Labour’s ambitions, balanced against her limited resources, she may have little choice but to take such a bold approach. But her path between alienating business and disillusioning the public is a narrow one. And the longer it takes for her strategy to bear fruit in terms of a better standard of living and improved public services, the more difficult things will become politically."
Pawel Bilinski, Professor of Accounting at Bayes, said the government needed to be explicit on exactly how it was planning to spend money to avoid a re-run of the ill-fated 'mini-Budget' of 2022.
Professor Bilinski said:
“The bond market anticipates that UK debt sales will be close to £300bn this year. Over the past 20 years, only borrowing during COVID-19 was higher. The government will have to be very clear on how the money will be spent to promote growth and increase the efficiency of public services to avoid a repeat of what happened after the 2022 mini-Budget.”
Meanwhile, Stefan Stern, Honorary Visiting Professor at Bayes, said the Government was correct to make bold moves.
Professor Stern said:
“If you aren't going to make bold moves when you have a majority of over 160 and the opposition is on its knees then there would be no point being in government.
"The Chancellor has set out a clear path, raising taxes and looking to boost spending on the NHS and other public services. We shouldn't really be surprised that a Labour government would do this. If growth continues, and improves, the Government will succeed. If growth falters, the Conservatives may get a hearing once again.”
Budget contained "important measures" but Higher Education continues to face existential threats
Rachel Reeves announced support for school and hospital infrastructure, but did not specifically mention the Higher Education. Dr Lise Butler, Senior Lecturer in Modern History in the School of Policy & Global Affairs, said the Budget 'bats away' claims the Government is continuing Conservative austerity.
Dr Butler said:
“The Budget contained meaningful spending commitments on school infrastructure and the NHS but gave negligible attention to the higher education sector, which is already facing existential threats.
“Universities will see increased financial pressures from the rise in Employers National Insurance contributions announced today.
“Reeves’ Budget contained important pledges that will rebalance the economy in the interests of working people and raise taxes on the wealthiest, including increases to the national living wage and capital gains tax, VAT on private school fees, and air passenger duty on private jets.
“While modest in its spending commitments, the new Chancellor’s first budget does reflect Labour commitments to reversing decline in public services and pay and will see off charges that the government is merely continuing Tory austerity.”
A rise in National Insurance contributions for employers is a "tax on labour"
Pre-election, Labour pledged to not raise taxes on working people. However, it is expected to announce a rise in employers' National Insurance contributions. Critics argue. Michael Ben-Gad, Professor of Economics in the School of Policy & Global Affairs argues this only amounts to a tax on employees in any case.
Professor Ben-Gad said:
“The change in National Insurance is a tax on labour. Who bears the burden? In the short term, employers. In the long run, workers through lower wage growth.”
Changes to debt rules
A controversial measure by the Chancellor is the changing of the government's own debt rules, with the aim of freeing up funds for infrastructure.
Professor Ben-Gad said:
“Most of the discussions around changes in the definition of net debt are academic. The fiscal rules are a distraction that keep the media occupied but do not interest investors.
“When purchasing UK debt, investors want to know how much it will be worth in the future. The expected trajectory of future deficits determines how many more bonds will be supplied in the market, and the real return through inflation. This trajectory will determine the cost of borrowing.”
Increases to the national minimum wage do not generally impact on jobs, but do they go far enough?
The Treasury has confirmed that the national minimum wage will increase by 6.7% to £12.21 per hour, and by as much as 16.3% for 18-20 year-olds to more than £10 per hour, in this Budget. Dr John Forth, Reader in Human Resources Management at Bayes, believes that although businesses generally aren't affected greatly by such rises and are able to adapt, they may feel under pressure when this arrives coupled with a rise in National Insurance contributions.
Dr Forth said:
“Increases in the minimum wage will be a significant boost to those on low earnings.
“The increase in the rate for 18-20 year olds is particularly significant, and means that the minimum wage for younger workers will have risen by around 25% in just over a year.
“Research shows that the labour market effects of minimum wage increases have tended to be fairly benign overall, partly because businesses have a number of different ways to adjust – including raising prices, cutting profits or holding back on wage increases for higher paid workers. But we have to see these changes in the round, and if other labour costs are also going to rise through hikes in National Insurance, then some businesses are likely to feel the pinch.”
Chris Rowley, Professor Emeritus in Human Resource Management at Bayes said wage rises were generally positive and popular policies, but it would depend on rises being correctly implemented.
Professor Rowley said:
“Raising the minimum/living wage is a positive move for a variety of well-worn reasons. As context, the issue is an old ‘hot potato’ that leads to the classic trundling out of vacuous assertions based on ‘more heat than light’. Much research shows little or no impact on jobs.
"In any case, there is the key benefit of raising the wage level universally. It removes the route by short-term and all-too-lazy businesses to compete via ever lower labour costs in a ‘death spiral’ as others will always undercut wages - rather than other means such as long-term investment, training, innovation, quality, and productivity. This is especially the case in the swatches of non-tradeable jobs.
"Of course, the ‘devil is in the detail’ and this will be seen in ensuring actual compliance."
Rachel Lara Cohen, Professor of Sociology, Work and Employment in the School of Policy and Global Affairs, said wage rises did not go far enough towards meeting the real living wage.
Professor Cohen said:
“It is disappointing that the discriminatory age-bands have been retained. Age bands are a form of legal exploitation. Hospitality and retail businesses have suffered in recent years, but young people should not be paid exploitative wages to ameliorate global crises.
“Under-paying young workers is a false economy, since younger people are also more likely to spend their income on eating out. Higher wages for young workers would likely translate into increased revenue for the sectors in which young people most often work.
“Many 18–21 year-olds live by themselves or support a family; others are working to pay for their education. Yet these workers will now legally be paid 18% less per hour than over-21s, even where they are doing the same work, amounting to £2 per hour less. This is not explained by a relative lack of experience because many young people have been in work since they were at school as shown by analysis of the Annual Population Survey.
“Half of 16 to 22-year-old workers had job tenure of at least a year, and 30 percent had tenure of over two years.”
Tax relief for television production could "buoy local industry and job market"
Among measures announced was a pledge to help creative industries, including tax relief for VFX in television and film. Professor Mattias Frey, Head of the Department of Media, Culture and Creative Industries in the School of Communication & Creativity, said the news would be welcomed by an industry in need of growth.
Professor Frey said:
“Visual effects (VFX) is one of the fastest-growing and important segments of television and film production in the age of CGI and artificial intelligence.
“The UK is on the cusp of becoming a world leader in this field, but will need continued and increased tax incentives to compete with other global players.
“The Chancellor’s announcement of tax relief for television visual and audio effects could buoy the local industry and job market with inward investment flows from streamer-funded large-scale projects.
“These tax cuts are much needed to recover from the recent challenges to audio-visual media production posed by the disruptions of COVID and then the Hollywood trade union strikes.”
Scrap to low-value immunity on shoplifting
The Chancellor also plans to repeal 2014 legislation that downgraded the crime of shoplifting in incidents of £200 or less in value. Emmeline Taylor, Professor of Criminology in the School of Policy & Global Affairs, welcomed the move.
Professor Taylor said:
“This announcement in the Autumn Budget is a welcome step, and one I have called for since 2019.
“The legislation signalled to offenders that they could steal with impunity and was interpreted as shorthand by the police as to whether they needed to take action. This move is part of a series of commitments by the Labour Party to finally get a grip on high-value acquisitive crimes that are impacting the high street, communities, and the public.
“Retail is the largest private sector employer contributing huge sums to the public purse. Those that work within it will welcome these measures to tackle theft but additionally because we know violence, abuse and antisocial behaviour often go hand in hand with shop theft.
“There are already several initiatives that bring police, local authorities, and retailers together to target serious organised criminal networks that have taken advantage of the UK retail sector being perceived as a soft option.
“The Chancellor's promise to provide better support to tackle these groups, that are also associated with criminal exploitation of vulnerable adults and children, makes a strong statement that not only is the government listening to the industry and correctly diagnosing the problem, but they are also willing to commit resources to tackle it.”
Investment in transport infrastructure "designed to capture a headline"
With a pledge to fix one million potholes in the UK, along with a rise to the bus fare cap to £3, the Government quietly laid out several measures to to develop rail and road networks. Dr Dominic Davies, Senior Lecturer in English at the School of Communication & Creativity, said fillng potholes would not make significant impacts in the communities that were most in need.
Dr Davies said:
"Adjustments to fiscal rules in this budget give Labour some leeway to make meaningful investment in Britain's crumbling infrastructure. But this economic wiggle room won't make up for the much stronger political vision that is needed to get the country's regions up and running again.
“The pledge to fix one million potholes was always a populist promise designed to catch a headline during the election campaign. Meanwhile, the 50% rise on the bus price cap will keep the most mobility disadvantaged off those roads altogether, especially beyond London.
“Tying local government into arbitrary targets to fix potholes is no way to boost life chances in regional towns and cities. Restoring devolved funding to councils and empowering them to pursue joined up infrastructure planning is a far more efficient way to meet the needs of communities."
Could a rise in Capital Gains Tax see an exodus of entrepreneurs?
Government plans could see a rise in Capital Gains Tax on sales of assets, which has caused widespread speculation that this might lead to many business owners taking their money elsewhere. Dr Amit Rawal, Lecturer in Management at Bayes, has called on exemptions for entrepreneurs in key sectors.
Dr Rawal said:
“Likely rule changes around capital gains tax have caused speculation around the amount of profits of business owners could obtain, as the threshold before tax is likely to change. On similar lines, amendments to Business Asset Disposal Relief (BADR), may mean that business owners looking to sell companies find it more difficult to do so with less tax relief.
“Aside from these financial changes, smaller firms are feeling the pinch of increased levels of inflation and the current cost of living crisis. On the whole, financial changes coupled with the UK’s current financial climate could impact the level of UK entrepreneurship and jobs that are created from start-ups. This will likely have a knock-on effect to how the UK start-up culture is perceived and questions whether Budget decisions are best for all.
“As an alternative, the Chancellor should promote UK entrepreneurship by enabling tax reliefs for tech business owners. This could assist a tech entrepreneur’s capital expenditures that support utilisation of newer, more ‘expensive’ technology, which could help them manage overall costs and investment opportunities."
Ruben van Werven, Senior Lecturer in Entrepreneurship at Bayes, said he did not foresee a great exodus, but said the Government needed to consider how entreprenuerial capital gains differed from other capital gains.
van Werven said:
"It seems unlikely that many entrepreneurs will leave the UK over capital gains tax alone, but it might tip some over the edge if they were already frustrated by other parts of the entrepreneurial ecosystem in the UK. Hopefully the Government will therefore use the extra tax income to invest in other ways to make the country more attractive to entrepreneurs.
"In future tax changes, the Government should consider the optics of how tax rates that affect the capital gains from entrepreneurship compare to other capital gains, such as those from selling a second home. The amount of risk taken and effort made before capital is gained differs strongly between those who invest in property, those who start new businesses, those who invest in new businesses at an early stage (seed round or Series A/B) and those that invest in new businesses at a later stage (series C onwards).
"Those differences could be reflected in the capital gains tax rate, although, admittedly, it would make taxation more complex."
What is missing?
Inevitaby in a Budget focused heavily on plugging a hole in public finances, there will be sectors feeling ignored.
Professor Rowley said:
"This Budget is missing a more robust and rigorous analysis, an innovative and policy programme, and an enforcement mechanism for a better regulating the ‘gig economy’.
"This could create a better and more equitable balance between flexibility and security. It could also address the all-too-common business practice of ‘gaming the system’ of ‘employment’ status - simply for avoiding tax and work-related rights - by too many unscrupulous businesses.
"All in all, good managers and businesses have nothing to fear. The poor managers and businesses will have to ‘up their game’ to compete.”
And what of the Office for Budget Responsibility's (OBR) Outlook report?
On the same day Ms Reeves delivered her Budget, the OBR published its Outlook report looking at fiscal impacts.
Professor Ben-Gad said:
“The big surprise of the Autumn Budget is the size of the tax increase and the amount being borrowed.
“The tax burden will rise to its highest ever level of 38.2% of GDP, close to the level in Germany and well above the OECD average of 34%.
“Yields on gilts are up by about 10 to 15 basis points which suggests markets are surprised by the scope of extra borrowing.
“Markets are not impressed by the change in the definition of debt. Most of the assets in public sector net financial liabilities (PSNFL) meant to offset the debt are illiquid and hence irrelevant for the purposes of determining the yields on bonds.”