Reflecting on the budget and the long-awaited annual spending review, Christian Spence, Head of Economic Analytics at the Future Economies Research Centre and Cathy Parker, Co-Chair of the Institute of Place Management share their thoughts.
A combination of a better-than-expected performance from the UK economy over the summer and the already announced increases to corporation tax, national insurance and the freezing of income tax personal allowances mean the chancellor had plenty room to deliver more spending whilst still allowing himself the political room to both balance the books and find room for some giveaways. He did a lot with this headroom (the announcements came like machine gun fire in moments throughout the speech).
There was certainly a narrative that pulled together the two aims of “individual prosperity” with “levelling up”. The former traditionally associated with the Conservative party of course, the latter with Labour. However, even with COP26 rapidly approaching, the third aim of “Net Zero” felt less important – a ‘box to tick’ (and which wasn’t) - didn’t form a part of the strategy.
The headline economic growth rates are strong in the short-term (they should be: opening up from pandemic-enforced shutdowns gives you a good bounce, and the bounce is bigger in the UK than other economies because our fall was larger), but they look pretty miserable over the long-term, even though the scarring effect from the pandemic now looks smaller than we thought. Growth of 6% for 2022 seems heady, too reliant for us on the labour market clearing its geographic and sectoral mismatches rapidly. The OBR’s judgement is that growth of around 1.5% per year in the medium-term is as good as it gets for economic growth, and it’s even worse when looking at GDP per capita or disposable household incomes. Long-run productivity is pencilled in at similar levels (with Brexit reducing growth potential by 4%, twice the long-run effect of the pandemic) meaning that there’s little sign of the touted high-wage, high-productivity economy that the government is so keen to promote.
Nevertheless, individual prosperity – as referred to in the Chancellor’s speech - could also be interpreted as people being a bit better off, not necessarily in a high-pay job. The national minimum wages and national living wage all increase by well above inflation in April next year. This will be a welcome relief to some of those who saw the loss of the £20 per week Universal Credit uplift. This will be important to a number of workers in retail, hospitality and other high street businesses. The announcement may not be so popular (or even affordable) for their employers whose businesses are still being impacted by COVID-19.
But these announcements won’t fill the gap and won’t help those who can’t work and will cause challenges for other sectors too like social care who will see large increases in wage bills. Even with the reduction of the taper rate (from 63% to 55%, meaning a working person on universal credit will keep only 45p of each additional pound earned), and the increase in the earning threshold, many low-income households will still be worse off, and before the rising cost of living, higher national insurance payments and frozen personal allowance are taken into account. The public sector pay freeze is lifted, but we’ll need to wait for the independent panel to report on what the rise should be. It looks like it’s not funded directly, so all increased pay will ultimately come out of the departmental budgets.
Public sector jobs are relatively evenly spread over the country – but private sector jobs are not so evenly spaced. Some town centres and cities are more dependent on the spending that comes from public sector workers, and this could increase, if public sector pay freeze is lifted. But this rise is likely to be low. Public services are key to town and city centres – especially as they become more multifunctional hubs. There is a lot of capital investment going into public infrastructure – will there be the high-quality and adequately remunerated people to staff these projects?
New fiscal rules were both announced and, unsurprisingly, announced as met, even with the increase in public spending. Public investment will be capped at 3% of GDP for reasons that remain unclear. All government departments will receive real terms increases over the rest of this parliament and, even though this will still leave many departments with only fractions of the budgets they had back in 2010, it will still be a relief to the unprotected departments outside of health, education, defence and international aid. Local government will see an increase in its block grant funding, but there’s a clear expectation that their budgets will be bolstered by increases in core council tax of 2% with an additional 1% for social care over the next three years.
Given the cuts to local authority funding over the austerity years – the average local authority has seen cuts to their spending power of around 1/3rd – town and city centres are still going to be woefully under-resourced, especially in non-statutory areas such as economic development and place management. This, in our eyes, is not levelling-up.
Health sees additional funding to deal with pandemic-induced backlogs and schools get extra money, taking the overall spend back to 2010 levels by 2024. There’s additional money for further education, T-levels, apprenticeships and adult skills, including a new adult numeracy budget to come out the UK Shared Prosperity Fund. This is the replacement for EU Structural Funds and will grow to become the same size as its predecessor by the time of the next election.
The first 100 allocations from the levelling-up fund were announced, sending just under £2bn to all parts of the union, which will also be strengthened by the halving of air passenger duty rates on internal flights around the UK. For those who don’t fly, fuel duty was frozen for the twelfth year in a row, making it cheaper to drive on the roads which continue to get their £27bn of investment with £5bn more for local roads and £2.6bn for repair backlogs. For those rather more committed to the zero-carbon agenda than those announcements suggest the government is, £5.7bn goes to city regions to support greener London-style bus networks and increased cycling infrastructure, but the revenue funding to get the fares down to London levels is still stuck in the depot. There was little to cheer those areas without city region mayors on transport who are likely to have to wait for the levelling-up white paper to hear more about devolution and powers for the counties.
The first 100 allocations of levelling-up monies reflected a diverse mix of what should be place-relevant projects. Colleges, markets, walking and cycling routes, museums and galleries, new homes, theatres – pretty much any type of construction/infrastructure project is on the list. Funding projects based on the analysis of challenges and opportunities articulated by local place leaders is the way forward. As is the support for community ownership. However, maintaining and activating infrastructure – of any sort – costs money and so the custodianship for much of this legacy needs much further consideration. Any additional revenue councils raise from council tax will be ear-marked for statutory services, not the type of place management activity we know is needed to make regeneration successful. We can’t expect the community to pick up all the costs either – projects should benefit for their time, expertise and enthusiasm – but there are ongoing revenue costs that will make or break the long-term success of this investment.
The government’s commitment to increase R&D investment is delivered, but two years later than originally planned. Businesses face some significant headwinds as they recover from the debt they’ve taken on: government-backed coronavirus loans and deferred tax payments will all hold them back this year, but with the exception of residential property developers who face a corporation surcharge of 4% on profits over £25m to help pay for the cladding crisis, there was a large package of announcements to support businesses.
Financial institutions get a 60%+ cut in the Bank Levy (a corporation tax surcharge paid by the financial sector) to bring their rate closer to the overall corporation tax rate, and the retail and hospitality sector gets 50% business rates relief. The business rates multiplier will be frozen for next year, and reliefs for green investment and improvements to commercial premises will be introduced. Wholesale reform would have been better, but that’s (once again) kicked into the long grass. Sir John Timpson always asks the Treasury the same question. Do you not reform business rates because it is too difficult, or is it because you don’t know how to? From the Chancellor’s comments that it would be “reckless and irresponsible to abolish a tax that raises £25bn a year” on the basis that the money would have to come from “extra borrowing, cuts to public services or tax rises elsewhere” it now seems like they do not want to.
In the short term, the business rates relief for some high street businesses will be a lifeline. With a cap on the reduction at £110,000, it won’t be so much help to Timpsons and other larger business. But more frequent valuations and the multiplier freeze may also help some more businesses avoid their tipping point.
The business rate relief for businesses making improvements or expanding is welcome. and talk to the levelling-up agenda. Looking at the wider set of policies, including funds for cycling, buses, walking and active travel, new greenspace, improved youth services and new community football pitches, this is where you can start to see some of the government’s ideas developing more clearly. Additional funding goes to museums, galleries, libraries, culture and orchestras through grants, building restorations and extensions for tax reliefs. Even the simplified alcohol duty rates (with a cut targeted directly at pubs through a reduction in draught beer duty) all send the right message. Add to that the additional adult skills funding, further help to start and grow businesses and supporting them to gain easier access to finance all have the potential to make differences to local economies. These are ultimately the things we needed to see more of, more coherently set out, and at a greater scale. But we will have to wait a few more weeks as The Augur Review of higher education, the integrated rail plan and the levelling-up white paper, are not yet published. Ultimately, levelling-up may just be putting back many of the facilities and services places lost through cuts to local authority and other budgets.
Nevertheless, there certainly is a lot in this budget for people who want to strengthen places. The shift towards funding projects that have been identified by local place leaders and partnerships, the broad interpretation on ‘infrastructure’, the rates relief, the investment in community ownership. However, a big concern remains high street business survival, especially the SMEs that are driving the high street revival. Many of these businesses continue to trade below pre-COVID levels so how many will struggle with repaying debt? Senior Fellow of IPM Bill Grimsey called for Bounce Back loans to be scrapped for high street SMEs (in the same way they have been in France). Without this assistance we predict an increase in insolvencies. We are disappointed a little more money couldn’t have been found to support small businesses that are struggling to repay debt.
The chancellor has left some of his windfall untouched to be treated as a war chest to fight any further pandemic battles. In reality, it’s more likely to be used to prepare his troops for the next election, ensuring that there’s enough money to throw some giveaways back to the electorate. That’s a big misjudgement. The next election is soon: we’re already halfway through this parliament, and the levelling-up plan hasn’t yet been published and the spending hasn’t even started. It will take time for local communities to see the results of this budget, and the wider economy and high street would recover more quickly if he invested now.