Autumn Statement 2022: City experts have their say
On Thursday 17 November 2022, Jeremy Hunt, Chancellor of the Exchequer delivered his first Autumn Statement in post amid high inflation and looming recession in the UK. Academics at Bayes Business School and City, University of London commented on the Chancellor's statement to the House of Commons, and what it means for people and businesses of the UK.
Pensions to uprate in line with inflation
Les Mayhew, Professor of Statistics at Bayes Business School, said:
'This rise was an inevitable move, given Mr Hunt had already decided to uprate benefits by inflation. Any other policy would have looked odd and divisive.
"However, the pension landscape has generally become far worse, both for those saving for a pension and those receiving any pension which is not inflation protected, and subject to various stealth taxes like freezing of thresholds."
Prior to the statement, Professor Mayhew had said:
“Normally the triple lock uprates the state pension by the highest of inflation, wages or by 2.5 per cent. With inflation running at 11 per cent, this could add £11 billion to public expenditure which may be a bridge too far for the Chancellor.
“Perversely there is every expectation that pensions are due for a big hit across the board. This will add to existing bad news for people, because of fixed-rate annuities, who will see the value of their pension decline in real terms thanks to inflation.
“For pension savers the news is bleak in two ways: First, the Chancellor could scrap the 40 per cent tax allowance on contributions into a pension plan for higher earners and reduce it to 20 per cent – which is the allowance for lower earners. Secondly, existing pension pots will fall in value if investment growth is less than inflation – a highly likely scenario."
Possible freezing of lifetime allowance on pensions
Professor Mayhew said:
“A final bit of bad news is that the lifetime allowance, which sets a ceiling on how much you can save in a pension over your working life, looks like being frozen and not uprated with inflation. Pension pots in excess of the allowance are already taxed up to 55 per cent – this will potentially cost individuals who have saved assiduously for their old age tens of thousands of pounds.”
A need for deeper thinking?
Stephen Thomas, Professor of Finance at Bayes Business School, said:
“Just as the world sinks into a global downturn, we are going to help it on its way with a completely unclever application of procyclical macroeconomic policy.
“Our pursuit of deeper thinkers among policymakers constantly fails to materialise. Perhaps we had one of these in Kwasi Kwarteng but he needed better PR advisers.”
Supply-side skill policies
Dr Gerbrand Tholen, Senior Lecturer in City’s Department of Sociology and Criminology, said:
“The chancellor’s comments on proposed skill policies demonstrate a continuation of a supply-side skill policies. He said he wanted to know that young people would leave the education system with skills they would get elsewhere, namely in Japan, Switzerland and Germany.
“What sets these countries apart is not only the type of skills that are developed within the workforce, but the much wider institutional and political coordination between stakeholders, employers, and the state. This has been developed over many decades and cannot be easily imitated, certainly not with enduring political reluctance to make greater demands on employers to take responsibility in the provision of training or improve the utilisation of skills.”
Office for Budget Responsibility (OBR) forecast
Dr Matt Barnes, Senior Lecturer in Sociology in City’s Department of Sociology and Criminology, said:
“The Office for Budget Responsibility (OBR) has forecast a drop in living standards over the next two years. While for many people this may mean reducing expenditure on discretionary items such as holidays and leisure activities, for others it will mean cutting back on essentials such as food and heating.
"Today's announcements to target support at the most vulnerable in society is to be welcomed, albeit cautiously.
"They include an increase to the National Living Wage, means-tested benefits and the State Pension rising with inflation, as well as capping rent rises in the social sector and extra help with energy bills for those with disabilities, on low income and pensioners.
"However, the question remains whether this support is enough to allow the most vulnerable in society to achieve an acceptable standard of living. My own research shows that two in five older people spent at least a year living in poverty (less than 60 per cent of median household income after housing costs) between 2010/11 and 2018/19. In addition, one in ten spent four to six years in poverty, and as many as one in twenty pensioners spent more than seven years in poverty.
"Long-term poverty brings an increased risk of material deprivation. A budget that protects the most vulnerable from the cost-of-living crisis may help to stop living standards from getting much worse, but for many, their living standards will continue to be far below a level that most of us would consider as acceptable in the UK today.”
Economics and philosophy
Professor Michael Ben-Gad, Professor of Economics in City’s Department of Economics, said:
“The UK is largely governed by Philosophy, Politics and Economics graduates, including both this PM, his predecessor and the current Chancellor. As successive budgets demonstrate, we can always count on the lessons learned in the politics lectures to be reliably implemented, economics only in extremis and philosophy never.
"Starting with economics, the meltdown following the mini-budget demonstrated that Britain's creditors have finally reached the limits of their patience. While most blamed the tax cuts, the introduction of the energy price cap was at least as damaging. Raising the price cap will not only save money, but encourage conservation and reduce the chance of shortages.
"Liz Truss and Kwasi Kwarteng's assertions about tax cuts being self-funding was not entirely unwarranted. On a per-capita basis, the UK ranks a mere 24th on the IMF’s list of 40 developed economies.
"Low rates of investment, both public and private, on capital as well as research and development explain some of this underperformance. Rises in corporation and business taxes and higher taxes on dividends, along with the increase to 35 per cent in the windfall profit tax, will lower the expected after-tax return on investment and will only prolong this record of stagnation.
"As for philosophy, once again this budget fails to address the more fundamental question of what functions should be provisioned by the state, and what is better relegated to civil society or left to the responsibility of the individual citizen.
"More money is budgeted for health care, social care, welfare support, rent subsidies, and to protect the triple lock on pensions. This leaves less for the more basic functions of the state, including defence (lowered back to the Nato minimum of 2 per cent of gross domestic product (GDP), law enforcement, and courts.
"If during peace time, a tax burden of 37.5 per cent of GDP by 2024-25 is consistent with the Tories’ concept of a free liberal society, how much higher will it go, when, as expected, they are replaced in two years by Labour?”
A rise in council tax limits
Dr John Stanton, Senior Lecturer in Law at The City Law School, said:
"Currently, any local councils wanting to increase council tax by more than three per cent are required to seek the approval of local people in a referendum.
"This measure ensures that local authorities cannot increase taxes substantially without local approval. Jeremy Hunt’s Autumn Statement, however, sees this limit increased to five per cent.
"Councils can, in other words, potentially now impose a five per cent increase on council tax without the need for a referendum which is problematic.
"On one hand, cash-strapped councils will be able to impose on local people an increase on local taxes without regard for unique, personal circumstances, thus meaning that those already worse-off are going to suffer the most.
"On the other hand, and with local government finance a perennial concern, the increase will do little to fill the funding gap that councils have long endured."
Funding for health and social care
Professor Rachel Cohen, Professor of Sociology, Work and Employ in City’s Department of Sociology and Criminology, said:
“Every Conservative Government since 2010 has claimed that there were efficiency savings to be made in the NHS. This has produced years spent restructuring to reduce bed vacancy and cut ‘non-frontline staff’.
“Consequently, today, skilled medical staff spend their time updating admin systems previously managed by back-office staff.
“We hear regular reports of patients left on trolleys in corridors and of hospitals unable to cope with upticks in infection, most dramatically but not uniquely, during Covid. Meanwhile the lack of social care capacity means patients cannot be moved out of hospital.
“None of this is surprising. Social and medical need will go up and down, and a management strategy that seeks efficiency and for medical institutions to work at 100 per cent capacity will inevitably fail to cope with demand peaks.
“Up until now, staff willing to go the extra mile have provided a bulwark against patient suffering.
“How long that willingness survives if the government does not provide the previously promised investment in social care – and in the face of a new NHS efficiency drive and below-inflation pay awards – is difficult to say.”
Implications of a public sector pay freeze
Professor Cohen said:
“Women make up almost two thirds of the public sector workforce as opposed to just 42 per cent of the private sector workforce.
"Imposing an under-inflation public-sector pay cap will disproportionately harm women workers and female-headed households.”
What measures can be put in place to tackle the energy crisis?
Ahmed Kovacevic, Professor of Compressor Technology in the School of Science and Technology, said:
"The ever-rising cost of energy will have a significant impact on industry and households.
"Around 60 per cent of domestic energy demand in the UK comes from heating where the potential for energy savings is the greatest. Heat pumps rely on compressors to move heat from the outside to the inside of buildings. They can deliver two to five times more heat per kWh of electricity than electric heaters or gas boilers.
"However, in the UK, the cost of electricity is five times higher than the cost of gas which makes heat pumps commercially unattractive. In European countries such as Finland and Sweden, the situation is in fact, the opposite.
"The Centre for Compressor Technology at City recently embarked on an industrial consortium called 'Compressors and Expanders in Future Energy Systems' (CERES), to perform critical research in related technologies in order to reduce energy consumption and enable technologies which could help lessen the effects of the current energy crisis."