Bayes academics react to the Chancellor's Autumn Budget

Rachel Reeves MP delivered her Autumn Budget on Wednesday 30 October. Ms Reeves, who gave the 2024 Mais Lecture at Bayes Business School in March, titled  'Economic Growth in an Age of Insecurity', set out the new Labour's Government's immediate economic priorities.

Amid revelations of a £40 billion 'black hole' in public finances, policies included increases to employer National Insurance contributions, capital gains tax hikes and cuts to VAT relief on private schools.  The Budget also announced a £22.6 billion injection into the National Health Service and changes to the way the government measures debt to allow for more borrowing.

A Budget for productivity?

Professor André Spicer, Dean of Bayes Business School, said improving productivity needed to be top of Rachel Reeves' list.

Professor Spicer said:

"Before taking on the job, the Chancellor focused on the issue of improving productivity within the UK economy," he said.

"This makes sense as productivity has been flat for years and growing productivity is the major driver of improvements in living standards.

"The question, however, is where are the productivity-improving measures in this budget?

"Typically you address this by investing in technology, innovation, infrastructure, skills and management quality. Most of the measures announced do not address any of these issues."

Pawel Bilinski, Professor of Accounting, said the Government needed to be explicit on exactly how it was planning to spend money to avoid a re-run of the ill-fated 'mini-Budget' of 2022.

Professor Bilinski said:

“The bond market anticipates that UK debt sales will be close to £300bn this year. Over the past 20 years, only borrowing during COVID-19 was higher. The government will have to be very clear on how the money will be spent to promote growth and increase the efficiency of public services to avoid a repeat of what happened after the 2022 mini-Budget.”

Meanwhile, Stefan Stern, Honorary Visiting Professor, said the Government was correct to make bold moves.

Professor Stern said:

“If you aren't going to make bold moves when you have a majority of over 160 and the opposition is on its knees then there would be no point being in government.

"The Chancellor has set out a clear path, raising taxes and looking to boost spending on the NHS and other public services. We shouldn't really be surprised that a Labour government would do this. If growth continues, and improves, the Government will succeed. If growth falters, the Conservatives may get a hearing once again.”

Increases to the national minimum wage do not generally impact on jobs, but do they go far enough?

The Treasury has confirmed that the national minimum wage will increase by 6.7% to £12.21 per hour, and by as much as 16.3% for 18-20 year-olds to more than £10 per hour. Dr John Forth, Reader in Human Resources Management, believes that although businesses generally aren't affected greatly by such rises and are able to adapt, they may feel under pressure when this arrives coupled with a rise in National Insurance contributions.

Dr Forth said:

“Increases in the minimum wage will be a significant boost to those on low earnings.

“The increase in the rate for 18-20 year olds is particularly significant, and means that the minimum wage for younger workers will have risen by around 25% in just over a year.

“Research shows that the labour market effects of minimum wage increases have tended to be fairly benign overall, partly because businesses have a number of different ways to adjust – including raising prices, cutting profits or holding back on wage increases for higher paid workers. But we have to see these changes in the round, and if other labour costs are also going to rise through hikes in National Insurance, then some businesses are likely to feel the pinch.”

Chris Rowley, Professor Emeritus in Human Resource Management at Bayes said wage rises were generally positive and popular policies, but it would depend on rises being correctly implemented.

Professor Rowley said:

“Raising the minimum/living wage is a positive move for a variety of well-worn reasons. As context, the issue is an old ‘hot potato’ that leads to the classic trundling out of vacuous assertions based on ‘more heat than light’. Much research shows little or no impact on jobs.

"In any case, there is the key benefit of raising the wage level universally. It removes the route by short-term and all-too-lazy businesses to compete via ever lower labour costs in a ‘death spiral’ as others will always undercut wages - rather than other means such as long-term investment, training, innovation, quality, and productivity. This is especially the case in the swatches of non-tradeable jobs.

"Of course, the ‘devil is in the detail’ and this will be seen in ensuring actual compliance."

Could a rise in Capital Gains Tax see an exodus of entrepreneurs?

Government plans could see a rise in Capital Gains Tax on sales of assets, which has caused widespread speculation that this might lead to many business owners taking their money elsewhere. Dr Amit Rawal, Lecturer in Management at Bayes, has called on exemptions for entrepreneurs in key sectors.

Dr Rawal said:

“Likely rule changes around capital gains tax have caused speculation around the amount of profits of business owners could obtain, as the threshold before tax is likely to change. On similar lines, amendments to Business Asset Disposal Relief (BADR), may mean that business owners looking to sell companies find it more difficult to do so with less tax relief.

“Aside from these financial changes, smaller firms are feeling the pinch of increased levels of inflation and the current cost of living crisis. On the whole, financial changes coupled with the UK’s current financial climate could impact the level of UK entrepreneurship and jobs that are created from start-ups. This will likely have a knock-on effect to how the UK start-up culture is perceived and questions whether Budget decisions are best for all.

“As an alternative, the Chancellor should promote UK entrepreneurship by enabling tax reliefs for tech business owners. This could assist a tech entrepreneur’s capital expenditures that support utilisation of newer, more ‘expensive’ technology, which could help them manage overall costs and investment opportunities."

Ruben van Werven, Senior Lecturer in Entrepreneurship, said he did not foresee a great exodus, but said the Government needed to consider how entrepreneurial capital gains differed from other capital gains.

van Werven said:

"It seems unlikely that many entrepreneurs will leave the UK over capital gains tax alone, but it might tip some over the edge if they were already frustrated by other parts of the entrepreneurial ecosystem in the UK. Hopefully the Government will therefore use the extra tax income to invest in other ways to make the country more attractive to entrepreneurs.

"In future tax changes, the Government should consider the optics of how tax rates that affect the capital gains from entrepreneurship compare to other capital gains, such as those from selling a second home. The amount of risk taken and effort made before capital is gained differs strongly between those who invest in property, those who start new businesses, those who invest in new businesses at an early stage (seed round or Series A/B) and those that invest in new businesses at a later stage (series C onwards).

"Those differences could be reflected in the capital gains tax rate, although, admittedly, it would make taxation more complex."

What is missing?

Inevitaby in a Budget focused heavily on plugging a hole in public finances, there will be sectors feeling ignored.

Professor Rowley said:

"This Budget is missing a more robust and rigorous analysis, an innovative and policy programme, and an enforcement mechanism for a better regulating the ‘gig economy’.

"This could create a better and more equitable balance between flexibility and security. It could also address the all-too-common business practice of ‘gaming the system’ of ‘employment’ status - simply for avoiding tax and work-related rights - by too many unscrupulous businesses.

"All in all, good managers and businesses have nothing to fear. The poor managers and businesses will have to ‘up their game’ to compete.”