Rachel Reeves delivered her much-anticipated Autumn Budget this week. We’ve taken a look at two key areas around minimum living wage increases and what the Office for Budget Responsibility’s (OBR) more confident economic predictions now mean for UK business.
Depending on where you take your news from, Rachel Reeves’ Autumn Budget announcement this week either ranges from one that gives the UK economy a much-needed shot in the arm or signals the last failed throw of the dice for a Government with a death wish tax raid on hard-working people.
You don’t have to try too hard to find myriad sentiments that would fit the colour of your flag, regardless of where that’s staked on the political spectrum. Today, we’re going to try to stick to the facts, analyse the key points and see how they play out for short-, medium- and long-term planning for those at the sharp end of the business.
Some of the basic headlines first.
Despite promising a year ago that there would be no need to dip back into the tax pot when the Chancellor delivered her 2024 Autumn Budget, there is a planned £26bn extra to be raised from this week’s budget. And someone is going to have to pay for it.
The Office of Budget Responsibility (OBR) now forecasts that the tax burden will rise to just short of 38% by 2027/28. In loose terms, that means the average taxpayer will eventually be contributing 38p in every pound earned. That’s up from 35.3% currently.
So is the increase in the national living wage a good thing?
In isolation, the promise to increase the national living wage to £12.71 for those over 21 (an increase to £10.85 for those aged between 18 and 20) should be seen as a welcome boost for those trying to make ends meet, but then the predictable knock-on effects cause inflationary pressures across the board.
Businesses will be under pressure to increase wages across the board as those on the national minimum living wage rise, then so the expectation from the other boats feel the same benefit of that incoming tide. That, of course, means business owners are back into that same quandary of trying to figure out how to pay for it. Take a hit on the profit line and upset investors, or accept that price rises for your product or service are the inevitable outcome, and run the risk of upsetting customers.
That too will then mean prices across the board are also rising, and those who might have initially been celebrating their Chancellor-induced pay increase might be disappointed to realise it’s not actually getting them any further at the tills.
Most, by now, understand that the giddy acceleration of AI into business and into everyday lives might not necessarily have large swathes of the workforce being replaced by the robots, but there will undoubtedly be those who will be thinking longer and harder post-budget about how and where certain processes and roles might well be automated. If not now, then in the future. That might well be a very plausible solution for many in business when it comes to potential solutions to those salary pressures.
A sobering thought for all connected to recruitment.
The biggest caveat to the minimum living wage increase sweetener was the fact that it came at the same time as a three-year freeze on the headline tax thresholds.
Everyone has a personal allowance of £12,570, and below that income is not taxed. Income between £12,571 and £50,270 is taxed at the basic rate of 20% if it is on earnings. Income between £50,271 and £125,140 is charged at the higher rate of 40%, and anything over £125,140 is taxed at the additional rate of 45%.
Tax threshold freezes were introduced by the last government as a means to raise more tax revenues, and the current government is in agreement that this method needs to remain, announcing a freeze until 2030.
It will effectively mean an estimated additional million people now liable to paying income tax at the lower threshold. At the opposing end, that freeze too will drag higher earners into higher tax bands as and when their wages increase.
One element tied to minimum wage considerations, and which went largely under the radar of the big headline grabbers, was the fact that the government will remove the 5% apprenticeship training levy for SMEs. That effectively now becomes free to SMEs looking to train and upskill their workforces through apprenticeships.
As with so many elements of a budget, as one loses with one hand, it’s worth checking what’s been gained with the other.
Minimum living wages and tax threshold freezes, while grabbing the headlines, weren’t the only things the OBR was paying attention to, and it’s worth looking at what it was within the budget that encouraged the independent watchdog to recalibrate its economic forecasts. It came as a huge boost to Reeves and the government that the mood from them was generally more positive than what it was 24 hours earlier.
So can the OBR’s cautious optimism be shared by all in business?
We’ll save the embarrassing publishing of the OBR budget forecast an hour before the Chancellor even got to her feet for another day and look instead at what encouraged them to make some optimistic projections.
Two key elements to this, so often the driver of confidence at the sharp end of business, were the post-budget prediction from the OBR that the UK economy will grow by 1.5% this year, a slight upgrade from the 1% they predicted in March. In their view, something’s working.
Similarly, the OBR predicted that inflation would average 3.5% in 2025 before falling to 2.5% next year before reaching the government’s target of 2% by 2027. When the current Labour government took over from the Conservatives last year, inflation was a hot topic, having peaked at 11.1% under the previous gatekeepers of the economy. It’s worth noting they’d largely got this back under control by the time they had to hand over the proverbial keys.
Its full post-budget analysis makes for interesting reading and casts slightly less optimistic views over productivity and employment rates, for example, but there can be no question mark on how the markets reacted to Rachel Reeves’ budget.
Often a very live and very real indicator of how an economy might start to pan out is that initial market reaction. It doesn’t take a long memory to recall the ‘panic’ of Kwasi Kwarteng’s mini budget in late 2022 under the leadership of Liz Truss, when headline-grabbing – but largely unfunded – tax cuts were met with an immediate plunge in the value of the pound to the dollar, hitting a 37-year low, with FTSE markets also taking a hit.
Instead, the pound, bond yields, and the FTSE all rallied at a budget that most commentators feared would be worse than it actually was for the economy.
Interestingly, Reeves announced the OBR’s forecasts of the government’s fiscal prudence would now be limited to one per year instead of two (the OBR will continue to produce two per year, but only one, in the autumn, will be linked to government budgetary announcements).
It’s very easy to mould Reeve’s move on this to fit a narrative that best suits your own. A positive step to try to remove any kneejerk reactions to temporary economic blips, or an unsubtle attempt to limit damaging communications from an independent economic body that has very real influence over mood and market behaviour. You choose.
Many will remember prior economic downturns and how many in business felt the mood of the nation talked its way into recession. The doom mongers got what they wished for as the news agenda was filled with gloomy predictions, forcing people to subconsciously tighten their belts when the data suggested the economy was more buoyant than the mood of the nation made it out to be.
Can we therefore talk up a good game this time round to offer some confidence to ourselves at the sharp end of business and, in turn, to those at home thinking about how to balance the millions and millions of domestic budgets up and down the country?
Predictions, of course, are all well and good. The proof will be in the pudding.