Mini Budget or ‘Growth Plan’ Briefing
Friday saw the latest Chancellor of the Exchequer announce ‘The Growth Plan’ or mini budget (although the scale of financial commitments is far from mini), with the aim of “tackling high energy costs and inflation and delivering higher productivity and wages”. The Growth Plan in short focuses on utilising Government borrowing to stimulate economic growth – not based on a Keynesian/New Deal style demand management approach with the state ‘purchasing’ economic outputs – but rather using borrowing to cut taxes.
The mini budget it is yet another example of how quickly political change is hitting our profession, with a hastily announced budget now signalling a significant change in the UK’s macroeconomic policy.
The mini budget followed a day after a major announcement on a package of support for businesses to manage increasing energy costs thorough the Energy Bill Relief Scheme. The scheme will offer a fixed rate cost per MWh for electricity and gas to non-domestic customers for a six month period, reducing bills by a varying amount depending on the current tariff a business is paying.
The headline grabbing elements of the mini budget has been the tax cutting and the likely eye watering levels of borrowing needed to fund it, followed on by the plunging value of the pound against major currencies.
The UK’s national economic policy appears to be driven by reducing taxes on employment, property, business profit, income and investment. The economic logic is that allowing businesses and households to keep more of their income, coupled with wider incentives, will lead to investment in activity that will improve economic productivity and lead to sustainable and productivity driven growth. The reduction (or rather the lack of increase) in Corporation Tax will allow businesses to retain more profit, but in a climate where many businesses still have impaired balance sheets after the pandemic, and many are grappling the wider cost of living crisis and rising interest rates, whether that retained profit will be invested in headcount or their long term growth is a very big question mark.
A second major question resulting from a change in policy away from growth being facilitated by redistribution and public investment to something more akin to supply-side economics (or the voodoo economics of the 1980s) is where does the Levelling Up agenda fit?
The whole notion of Levelling Up is based around the use of the state to facilitate and unleash the power of areas that have been left behind. Sometimes this is to be achieved by rolling back the role of the state across certain functions (led by devolution), but in most areas of the White Paper it is driven by state led investment across the ‘pillars of productivity’.
There is still a Secretary of State in place covering Levelling Up, Housing and Communities in Simon Clarke and the Prime Minister in her first speech in the commons stated Levelling Up was remaining a priority. However, whether Levelling Up becomes conspicuous by its absence in dispatches in the coming months, has a change in focus or even has a renewed vigour remains to be seen. Tackling economic inequalities and disparities are more in focus in times of relatively strong economic performance than during downturns, where national recovery is more important however it has to be delivered. It is also unclear how the new approach will impact on wider approaches to devolution, with many Authorities waiting on proposed County and Devolution Deal announcements.
The wider implications of the mini budget on the macro-economic prospects for the country have been covered in detail by a range of commentators, and to a significant level of fiscal detail and political consequence. CEDOS is particularly interested in how the Growth Plan will have implications and ramifications for local economic development and some of the potential spatial impact of the proposals.
Cutting a range of taxes affects individuals across income bands differently – which in turn has a differential spatial impact. This is particularly relevant to increases in the Property Based Stamp Duty threshold from the first £125,000 to the first £250,000. According to ONS, as of March 2022 the median house price across England was £270,000, but this hides considerable regional variation. The average house price in London being £550,000 and the wider South East £355,000 compared to £145,000 in the North East and £180,000 in Yorkshire and the Humber.
Clearly there will be fewer properties/purchasers that can take advantage of the upward movement of the threshold in the North East and other regions where average prices are low compared to areas of high housing costs where few properties will sit below the threshold. This will also be significant within smaller geographies where significant price differentials and patterns of tenure exist between neighbourhoods. How much of this ‘benefit’ is offset by increased mortgage borrowing costs going forwards also remains to be seen.
Similarly, the reduction in income tax by 1p in the pound and the abolishing of the higher rate tax band will affect some areas more than others in terms of increasing levels of disposable income, which in turn will have an impact on local retail and services.
There are also changes proposed to Universal Credit that will affect claimants who earn less than the equivalent of 15 hours a week at National Living Wage. These claimants will be expected to either increase their earnings or face a reduction in benefits. It has been forecast this change will potentially affect 120,000 people. Whilst there is nothing that Local Authorities can do directly to intervene in the imposition of sanctions by DWP, employment and skills provision locally will need to evolve to the changing situation. Again, the affects of this policy will not be felt evenly.
There is also a recognition that rising inactivity in over 50s after the pandemic is also impacting on skilled labour shortages and ultimately productivity. The solution is to allocate more time with a work coach, but the reasons behind declining activity rates in over 50s are complex and are also partly linked to health conditions and structural weaknesses in the care sector and not just a conscious choice to leave the labour market. Again, the spatial impact of this policy will be varied, with many CEDOS areas that are coastal areas reporting of a significant decrease in the workforce of over 50s.
The final element of the mini budget has been the launch of new Investment Zones, aiming to release land for new homes and commercial investment. Government states it is in discussion with 38 local authorities and Mayoral Combined Authorities to set up a process to allocate a series of Investment Zones across England. The plan is for each Investment Zone to offer a range of tax cuts for businesses and to simplify planning rules so that more residential and commercial development can be fast tracked. The aim is that.
“These will be hubs for growth, encouraging investment in new shopping centres, restaurants, apartments and offices, and creating thriving new communities.”
There is at present, little detail on what an Investment Zone might look like, what benefits they may bring to local areas, the process for allocating Zones across England and some of the strings and conditions that may come with it. It is also not clear how this policy will dovetail with Enterprise Zones and Freeports.
Some of these decisions may be ultimately locally unpalatable, both politically and in local communities, especially if planning is simplified too much and the benefits are seen to be nebulous.
Investment Zones, coupled with reducing Corporation Tax and capital allowances (and the weaker currency) creates a stronger climate to secure Inward Investment – which in turn may improve as and when the UK signs more trade deals. However, this also has to be seen in context of labour shortages, increased energy costs and the ongoing changes since BREXIT.
Finally, the mini-budget paved the way for further announcement on accelerating new road, rail and energy projects, which again CEDSO will watch closely when further announcements are made.
The longer term implications of Friday’s announcement remains to be seen. The significant increase in borrowing may lead to more austerity further down the line and might signify a policy change in how local growth is delivered, with the taxation system being used more than grants and the welfare to work system going forwards placing more emphasis on stick than carrot.
We are also in an environment where the Government is trying to tackle the stagnation of economic growth through a significant stimulus, whilst the Bank of England try to take the heat out of the economy through raising interest rates to reduce inflation. It is not clear quite how this dynamic will work itself through in households and businesses up and down the country.
The announcement of a ‘tax driven, trickle down economic policy’ coming a day after perhaps one of the largest state led interventions in free markets since nationalisation does come with a certain irony. It also creates some ideological confusion on what the way forward for economic growth will be under what is effectively a new Government.
The upshot for the economic development profession, more uncertainty, more change and more challenges.