The Autumn Budget and Spending Review

A tax and spend budget? Last week Chancellor Rishi Sunak announced £70bn of additional spending over the next three years, taking real term spending per head back up to 2009/10 levels by 2024. Full Budget and SR documents here.

• Austerity repudiated. In its analysis, the IFS suggested that “fiscally speaking this year will go down as a once in a decade event...when public spending was increased across the board” - by 2024-25, an 8.3% real terms increase on 2009-10. A Keynesian-style spending budget when debt is still high and the recovery not yet consolidated could be seen as a tacit acknowledgement that austerity in 2010-13 was a mistake: the opposite choice was made by George Osborne then.
• The tax share. Sunak’s Budget speech did not mention what was in fact its most significant measure, the rise in National Insurance contributions (subsequently to be turned into a new ‘Health and Social Care Levy’) he had already announced. As the Resolution Foundation noted in its analysis, along with the rise in corporation tax and freeze in income tax thresholds announced in the spring, this will take the share of tax in GDP (sometimes called the ‘tax burden’) from 34% to 36.2% in 2026-27. The tax share will then be at its highest level since 1950.
• Post-neoliberalism and the free-market right. The Adam Smith Institute’s response criticised “this high-tax, big-spending budget...largely bankrupt of inspired policy”. Similarly, the TaxPayers’ Alliance took aim at the “highest tax burden in 53 years”, while the Institute for Economic Affairs was disappointed that “there is no plan to run a budget surplus in the coming years”. Political economists Will Davies and Nicholas Gane explain how the political right’s reactions to the covid-19 pandemic could signal a break with neoliberal orthodoxy ”and, in particular, from their overriding concern for the market”.

“Austerity is over, but not undone”. The IFS’s Ben Zaranko suggested that spending increases mean “austerity is over, but not undone”. Though departmental spending is set to rise across the board until 2024-25, only the Department of Health and Social Care (42.4%) and Education (2.4%) will see their Budgets higher than 2009-10 levels. In its response to the Budget, the Women’s Budget Group argues that “the increase in spending will not take most departments back to pre-2010 funding levels… nor will it repair the damage done to the public sector after a decade of successive cuts.”

Universal Credit. Another Budget measure which the Chancellor did not mention in his speech was the removal of the £20 a week Universal Credit (UC) uplift. Instead, Sunak announced that he was changing the Universal Credit ‘taper rate’, under which UC is reduced as claimants work more hours. The taper rate (which effectively operates like a marginal tax rate on income from work) would fall from from 63% to 55%. Analysts noted that this would compensate for the uplift cut for only about 25% of UC claimants. NEF pointed out that the poorest 20% of people will be receiving £380 per year less from Universal Credit than if the £20 uplift had stayed in place, pushing 300,000 more people into poverty this winter. JRF’s Katie Schmuecker said “Lowering the taper is a good thing to do, but it’s no substitute for the basic level of protection we all need social security to provide”. In his speech Sunak described the UC taper rate change as a “tax cut”. Several observers noted that, if the Chancellor concedes that the taper rate is a tax on work, it was hard to justify it being even 55%, well above the top rate of income tax. 

Distributional impacts. Economist Jonathan Portes argued that the overall impact of the Budget’s welfare, tax and spending decisions on different income deciles was “broadly progressive”, as ‘benefits in-kind’ from public services largely accrue to those on lower incomes. However, NEF’s Alfie Stirling points out that once you take into account the cutting of the £20 uplift to Universal Credit, all of the net gains in the bottom end of the income distribution are reversed. 

Rise in minimum wage. The Chancellor announced a 6.6% rise in the National Living Wage, from £8.91 per hour to £9.50 per hour, following recommendations made by the Low Pay Commission.

• Responses. In its response statement, Graham Griffiths, director of the Living Wage Foundation, drew attention to the “substantial gap” between the real Living Wage and the government-mandated minimum wage, which employers can still give. Autonomy argued that a national minimum wage of £10.50 per hour is “eminently achievable” by “shaving the incomes off the top 1.23% of the workforce” and could give a pay rise to 4 million people. 
• A ‘high-wage economy’? The TUC’s chief economist Geoff Tily pointed out argued showed that a rise in the minimum wage isn’t enough to secure decent pay across the economy. The IFS calculated that, given higher inflation, the average household is set to be £13,000 worse off by the middle of the decade, an “unprecedented two-decade hit to earnings [that] would leave average household disposable income 42% lower than it would have been had wages grown at pre-2008 financial crisis rates”. The IFS’s forecast for stagnant real wage growth put into question Sunak’s optimism about a transition to a new, high-wage economy. Commenting on the forecasts, James Meadway argued that tight labour markets and growing union membership offer a route to “inflation-beating pay rises across the economy”.

Local government will continue to struggle. Local governments received an additional £4.8bn of new core funding until 2025, but the IFS warned that councils are likely to struggle without additional funding from central government, since additional revenue will be wiped out by rising inflation and higher wage costs from lifting the public sector pay freeze. 

• Levelling up funds. Sunak also announced an extra £2.6 billion for the UK Shared Prosperity Fund over the Spending Review, and allocated the first £1.25bn of the Levelling Up Fund. The Byline Times’s Sam Bright explains that the English local authorities given money have lost vastly more, £25.5bn, in spending power between 2010 and 2018. To compete for the new funds, councils must pitch economic development plans aligned with the government’s preferred economics of inward investment and agglomeration. Former CLES Director Neil McInroy explained why addressing regional inequality requires real devolution of power over economic strategy and spending decisions from Whitehall.
• Tests for the levelling up agenda. Centre-right think tank Onward’s response called on the Treasury to “publish a regional distributional analysis” to understand how tax changes affect different regions and “ensure that the levelling up agenda is not held back by the tax system.” A group of progressive economists and think tanks recently called for Equality Impact Assessments that cover all of the Treasury’s tax and spending decisions and evaluate their impact upon different regions, races, genders, and other protected groups.

Social infrastructure. The government announced that it would fund 75 ‘family hubs’ in a £500m package to provide essential services to young families. Observers noted the resemblance to the Sure Start centres set up by the Labour Government from 1997 to 2010. Government spending cuts had forced 1,300 Sure Start centres to close over the last decade. The Women’s Budget Group argued that the Government should recognise childcare as vital infrastructure, where costs can be recouped by job creation and savings on social security; an estimated 1.7 million people were prevented from taking on more paid work because of difficulty accessing childcare.

A ‘climate-void’ budget. The Chancellor announced £30bn in green investment over four years (breakdown here.). This figure is far below than the £30bn of investment every year called for by progressive think tanks and economists in their Open Letter to the Chancellor published before the Budget. NEF’s Miatta Fahnbulleh and IPPR’s Carys Roberts both referred to this in the Guardian’s panel response. With the Chancellor cutting air passenger duty on domestic flights and freezing fuel duty again (and not mentioning the word ‘climate’ at all), IPPR referred to the event as a ‘climate-void’ budget.