'The chancellor delivered a continuation of austerity, public spending cuts and tax hikes.'

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

Jeremy Hunt, the UK Chancellor, has delivered his Autumn Statement. Economic reset, it isn’t. A pressing need for the country is to rejuvenate its economy and that can’t be done without substantially improving people’s disposable income and public investment in infrastructure and new technologies, especially as the private sector has shown little appetite for long-term risks. Instead, the chancellor delivered a continuation of austerity, public spending cuts and tax hikes.

The most headline grabbing item in the budget is that from January 2024 the rate of national insurance contributions (NIC), effectively a tax, paid by 27m employees will be cut. Currently, NIC at the rate of 12% is payable on income between £12,570 and £50,270, and 2% on income above that. The headline rate will be reduced to 10%, at an estimated annual cost of £10bn to the government coffers. Next April, class 2 NIC paid by 2m self-employed persons are to be abolished, together with reform of class 4 NIC. The government claims that that employees earning £35,400 will save £450 a year, and an average self-employed person could benefit by £350 a year. There are no changes to the NIC rate for incomes above £50,270, effectively ensuring that the well-off will continue to pay a lower proportion of their total income in NIC.

To put the so-called £10bn relief in perspective, it needs to be noted that for the last two years the government has frozen personal allowance and income tax and NIC thresholds. Due to fiscal drag, the government is set to collect £40bn a year extra. So people are getting back only a fraction of what they have already paid.

Away from the government hype, the gains are skewed because income distribution is skewed. The Institute for Public Policy Research (IPPR) estimates that:

 “For every £100 Jeremy Hunt spent on personal tax cuts, £46 will benefit the richest fifth of households. Only £3 of every £100 of tax cuts will go to the worst-off families”.

Regional inequalities will also increase. The IPPR adds that the cut

“will mainly benefit people in London & the South East of England, who will gain on average (per working age person) £316 and £290 respectively, compared to £192 for people in the North East.”

Elsewhere, the triple-lock on the state pension is to be retained and it will rise by 8.5% from April 2024. In April 2023, the full state pension for post-2016 retirees was around £10,600 a year. Of the 3,057,000 retirees eligible for this rate, only about 50% received the full amount. The rate for pre-2016 retired persons was around £8,200 a year. Of the 9,576,000 eligible retirees for this rate, only about 75% received the full amount. Even with an 8.5% rise, the full state pension will be around half of the minimum wage, and well below the OECD average.

Universal Credit and most other benefits will rise by 6.7% from next April, effectively a real-term cut. Government intends to force thousands of sick and disabled persons to work, and those refusing would face cuts in their benefits.

From April 2024, the headline minimum wage will rise by 9.8% to £11.44 an hour, increasing the wage of average full-time worker by up to £1,800 to around £22,000 a year. However, after income tax of 20%, NIC of 10% and higher VAT and indirect taxes, workers will still feel the squeeze. The Joseph Rowntree Foundation estimated that in early 2023, a single person needed to earn £29,500 a year to reach a minimum acceptable standard of living, and a couple with two children needed £50,000 between them. The rise in the minimum wage does not lead to equitable distribution of income or social justice.

Around 19.2m people (29% of the population) live in households below the minimum income standard and are deprived of a chance to live with dignity. Some 14.4m are living in poverty. The number of people experiencing destitution has more than doubled in the last five years to 3.8m. There is little relief for the poorest. The NIC reduction confers no benefit to some 18-19 million adults surviving on annual income of less than £12,570. The government could have helped by reducing indirect taxes, such as VAT, but chose not to.

The government could have generated additional revenues for redistribution and investment by eliminating tax anomalies and perks of the rich. For example, by aligning the tax rates of capital gains and dividends with those applied to wages. The Chancellor ignored such calls even though low investment, low productivity and rising inequalities are damaging the economy.

“Growth” has been the government’s mantra, but there is little in the budget to promote it. Deputy Governor of Bank of England has stated that Brexit has ‘chilled’ business investment. Since 2016, private sector investment has increased by less than 1% in real terms each year. In a table of 38 OECD countries the UK is ranked 35th. Low inflation, interest and corporation tax rates, and subsidies have failed to secure higher investment, especially as people’s disposable income has shrunk.

The government’s puny response is to provide £4.5bn for investment in advanced manufacturing during five years to 2030 (actually, already announced) through subsidies and grants rather than direct investment. Its ambitions are dwarfed by other countries. For example, consider the case of the crucial semi-conductor industry. The US has tabled a package of $50bn, China $40bn and India $10bn, while the UK has put forward just £1 billion, or $1.2 billion.

In accordance with its failed policies, the government is handing another £11bn tax cut to corporations disguised as 100% first-year capital allowance. This will reduce the effective rate of corporation tax, but does not guarantee that the UK will be a key player in emerging technologies or even that the resulting technologies and products will be sold within the UK. Fossil fuel companies get subsidies but are not obliged to prioritise the UK for sale of their products.

There is a dire need to improve transport, education, healthcare and other crucial sectors. Schools, roads and public buildings are crumbling, local councils are going bankrupt, and people are waiting for 7.8m appointments in NHS hospitals in England. The government response is to further squeeze the public sector by demanding that it “increase productivity growth by at least half a percent a year” i.e. deliver more for less. It means more real cuts in public investment and wages of doctors, nurses, teachers, firefighters, police and other public sector workers. As a majority of public sector workers are women, the cuts hurt them disproportionately.

The Office for Budget Responsibility (OBR) estimates that there will be “£19.1 billion erosion in the real value of departmental spending”. Public spending is set to fall as a share of the economy from 44.8% to 42.7% of GDP. Longer queues for healthcare and food banks are inevitable. The cuts will have a roll-on effect on the private sector too as it supplies goods and services to the public sector.

The budget has no effective policies for tackling inflation and the accompanying cost-of-living crisis. Rather than checking profiteering, the government has used higher interest rates to force people to hand their wealth to banks. In the first nine months of 2023, big banks (Lloyds, Barclays, HSBC and Natwest) made pre-tax profits of £41bn, compared to £23bn for the same period in 2022. Windfall taxes on banks could have been used to finance social investment, but the government does not do so. Indeed, the budget does not broaden the tax base.

The OBR states that

“Inflation is expected to be more persistent and domestically fuelled … Markets now expect interest rates will need to remain higher for longer to bring inflation under control”.  

This will squeeze households and SMEs though inflation will boost nominal tax revenues and the government’s kitty for bribing voters with tax cuts in its Spring 2024 statement. However, higher inflation also increases cost of welfare benefits and higher interest rates increase the cost of servicing the public debt.

The light relief to households is accompanied by record rise in the number of income tax payers, as personal allowance and income tax and NIC thresholds remain frozen until 2028. The OBR’s analysis is that between 2022-23 and 2028-29, 4 million additional persons will be expected to pay income tax, 3 million more will have moved to the higher rate (40% marginal rate), and 400,000 more onto the additional rate(45% marginal rate).

These stealthy changes will deplete people’s purchasing power and damage prospects of economic recovery. The OBR  adds that the:

“Tax changes in this Autumn Statement reduce the tax burden by 0.7 per cent of GDP but it still rises in every year to a post-war high of 37.7 per cent of GDP by 2028-29. Income tax increases explain most of the increase in this forecast, rising from 10.2 per cent of GDP this year, to 11.3 per cent in 2028-29 driven by threshold freezes and strong nominal earnings growth. … VAT and corporation tax also rise from 6.4 and 3.4 per cent of GDP this year to 6.5 and 3.6 per cent of GDP in 2028-29”.

Overall, the government remains a prisoner of defunct economic theories which shuffle wealth to the rich on the assumption that they can somehow revive the economy and something will somehow filter-down to the masses. That has not been the case.

The government’s hatred of the public sector means that the state cannot bridge the investment gap and supplement private investment. Its constant attacks on workers have reduced household disposable income and eroded possibilities of economic revival. The grim reality, as summed-up by the OBR, is that the living standards are set to be

“3½ per cent lower in 2024-25 than their pre-pandemic level [and] represents the largest reduction in real living standards since ONS records began in the 1950s”.

Only redistribution of income and wealth, and an entrepreneurial state can offer a brighter future.

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