A budget supporting the workers and looking to the future
The long awaited budget of the first labour government in 14 years has finally been delivered. We knew that the new Chancellor will face challenges, since she got the job (even before) she has paved the path for what she claims is going to be a budget to sort out Britain’s finances by taking the risk of increasing taxes. The budget has been described as “bold” and essential to rebuild Britain's economic foundation. The Chancellor managed that by safeguarding those in low incomes, increasing the tax for business and investing in the future of our workforce.
Increase in taxes
Yes, Britain is no more a low tax country, with Britain having the biggest tax-raising Budget since 1993 last week. The chancellor decided to pass the tax burden on businesses and asset owners, increasing the employers’ National Insurance by 1.2 percentage point and a lowering of the threshold at which businesses start to pay the levy from £9,000 to £5,000.
Undoubtedly the new government has initially passed the cost of extra tax to business instead of working people, but many economists are concerned about what we call “spill over effects” which in this situation may be negative. Employers will face higher labour costs because of the new taxes, and to cover these costs the business will have to decide on reducing the pay rise that they give annually to employers or to reduce their workforce. As a result the tax that had a direct impact on the business will have an indirect impact on the workers by lowering their projected household income.
The Office for Budget Responsibility estimates that the new budget policies will continue supporting household income, but income growth will be halved from what was estimated before the measure will take place.
Supporting National Minimum Wage
One measure that the government took to support workers was the increase in the National Minimum Wage to £12.21 an hour in April, an increase of 6.7%, with more than 3 million low-paid workers in line for a pay rise. The National Minimum Wage has supported low paid workers since its introduction, being one of the main tools of the government getting people out of poverty and supporting household incomes. This has been one of the most successful safeguards that Britain has for the low paid, and I am glad to see the new government continuing supporting it.
However, small businesses mentioned their concerns about the increase in both the National Minimum Wage and National Insurance tax. It could make small and medium enterprises struggle to sustain their business and they will probably have to transfer the cost to consumers by increasing the prices of products and services. The IFS mentioned the impact that both policies will have on the increase of the labour cost. “It will cost 5.4% more to employ someone on £11,500 a year (10th percentile of earnings), compared to 2.5% for a median earner.”
Investing in the future
One of the most significant changes we saw in this budget compared with previous ones was the investment into public services and infrastructure.
The Chancellor mentioned that the Department for Education will receive £6.7bn of capital investment, a 19% real-terms increase. That includes £1.4bn to rebuild more than 500 schools in the greatest need. She will also increase the school budget by £2.3bn to support the hiring of teachers. That will increase per-pupil spending in England by 1.6%, putting resources above their 2010 level for the first time.
Similarly, the chancellor promised a 10-year plan for the NHS in the spring, targeting 2% productivity growth next year. She announced a £22.6bn increase in the day-to-day health budget, and £3.1bn increase in the capital budget. That includes £1bn for repairs and upgrades, and £1.5bn for new beds in hospitals and testing capacity.
IFS mentioned concerns about that increase in public spending, and very wisely mentioned that health and education services face higher costs as well, so the expected returns from those investments may not occur.
The Chancellor is expecting that this investment will boost economic growth in the future, something that OBR has confirmed, but however is not expected to happen before the next elections. Something that made many labour MPs worried as the Chancellor is taking a risk of which the benefits may not be fruitful before the next election; but many economists were relieved as it is something worth mentioning a government not looking for the short sighted election cycle and focusing on the long term prosperity of the country.
Higher investment from the government in education and health sectors is intended to be an investment in the future of our workforce. This would be another spillover effect expected from this budget, but more beneficial for the economy. One of the issues of the UK’s stagnation has been the increased number of people out of the workforce because of long term illness, including a rise in the number of people suffering with their mental health. Investing in healthcare services will support workers to be economically active and potentially we may be able to see an increase in the UK's productivity.
Supporting education services can be a cornerstone to fight child poverty and provide better opportunities for disadvantaged children, while at the same time investing into a more productive workforce for the future.
The Chancellor seems to have been praised by international institutions such as the IMF for her approach to the budget, providing the foundations for a future more stable economy. By passing the costs to business and safeguarding the low pay workers, she is trying to provide a more equitable approach to the budget. However, the indirect impacts to workers will be notable as businesses will transfer the cost of higher taxes either to consumers or reducing their labour costs. Lastly, I am happy to see a budget investing for the long term. We don’t aim to see the benefits of many of these measures to the economy till after the next election, something that is a happy change based on the short-sighted budgets that we have faced over previous years.