Elephants in Sunak’s Budget Room: Overlooked Problems May Disrupt UK Economic Growth, Observers Warn

Chancellor of the Exchequer Rishi Sunak on Wednesday delivered his Budget in the House of Commons. The newly proposed measures include cuts to the Universal Credit taper rate, bringing it down from 63% to 55%; a 50% business rates discount for the retail and leisure sectors in England; a freeze on fuel duty; more funding for schools; and even taking three pence off the price of a pint of beer, to name but a few.

Sunak asserted to British lawmakers that the UK economy had not been damaged as hard as had been previously expected, projecting that it would return to pre-COVID levels in 2022, and set a goal to increase the National Living Wage next year by 6.6%, to £9.50 ($13.08) an hour.

Major Policy Changes

The UK government's policy changes aimed at boosting the UK economy will bring challenges too, according to Dr Renaud Foucart, senior lecturer at Lancaster University Management School.

First, the government has made a "big move in favour of low earners" by reducing the Universal Credit taper rate. The Universal Credit is a monthly (or bi-monthly) payment to help low-income or jobless people with their living costs. The UC taper rate determines the amount of money taken from a claimant's payment for every one pound that he or she earns. Currently, this rate stands at 63% which means that for every pound UC claimants get for their job, 63p is deducted from their Universal Credit payment.

"In the previous system, they were by far facing the highest marginal tax rate in the economy; as Universal Credit transfers decrease when income rises", Foucart explains. "This marginal tax rate will be considerably lower, down to 55%. Universal Credit recipients still keep less than half of each additional pound they earn, however".

At the same time, "those not able to work are made considerably worse off", the academic warns. "The £20-a-week cut in Universal Credit, combined with a forecast inflation of at least 4% means that in real terms they will be much poorer", Foucart points out, adding that this includes people who are sick or disabled for instance.

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Second, the Boris Johnson government is addressing what it considers to be priorities of their voters by, for example, lowering the cost of a pint in the pub or lowering – in real terms – the fuel duty for car drivers, he continues.

However, the problem of pubs is not low demand at the moment, but a difficulty to find staff in the wake of Brexit, which already leads many of them to reduce their offer, according to the academic. Meanwhile, the lower fuel duty as well as a decrease in tax for short-haul flights comes in contradiction with the government's environmental goals set up only a few days ago, Foucart remarks.

Third, the BoJo Cabinet shifts focus to more public spending: "The Office for Budget Responsibility (OBR) estimates public spending in share of GDP will be the highest since the late seventies", the academic notes, stressing that the incumbent government does it "by very visibly reverting cuts from previous Conservative governments in education or the funding to local authorities".

Fourth, more spending usually comes with more taxes: "Different tax increases will lead to what the OBR forecasts to be the highest tax burden since the early 1950s", the economic expert observes. Still, he does not rule out that the government will keep taxes high in the medium run, "in order to be able to decrease them before the next election".

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'2022 Will be More About Survival, Not Investments'

Meanwhile, there are elephants in the room the BoJo government prefers not to speak about, according to Renaud Foucart.

"What matters the most is maybe what is not in the budget: inflation is high, much higher than the Bank of England target", the academic says. "This means that everyone whose salary does not increase by at least 4% will be poorer next year, without even taking into account the tax rises".

In addition to that, the supply chain and labour scarcity problems remain massive, Foucart notes. This situation can only have two consequences, according to him: "either much higher salaries in specific sectors, increasing the prices for everyone else, or more imports of cheaper goods from abroad". And this might be a problem given the already weak UK manufacturing sector.

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"Finally, the OBR releases together with the budget evaluation an update on the cost of the loss of trade from Brexit: much higher than the long run cost of COVID, a 4% drop in productivity", Foucart highlights. "How the UK compensates for this loss is still an open question and the very existence of this loss remains taboo for the current government".

British Independent Retailers Association (BIRA) CEO Andrew Goodacre shares the academic's concerns: "We believe more could have been done", he insists. "This is especially true considering all the other inflation-busting increases such as wages, energy, supply chain, etc."

While the government measures are aimed at encouraging investments in the UK economy, the problem is that 2022 will be more about "survival", according to Goodacre.

"It will be a really difficult year for the high street and we hoped for more recognition of this to protect local communities, jobs and livelihoods", the businessman forecasts.