Eurfyl ap Gwilym assesses the impact of yesterday’s budget announcements on Wales

March 20th, 2014

Many of the measures announced by the Chancellor in his 2014 UK budget yesterday had been well trailed. The old practice of keeping budget measures under wraps until revealed in the Chancellor’s speech is long gone.

Another means by which the impact of measures is defused is that tax and spending changes are often announced in March of one year but will not take place until thirteen months later. In this way any unpopular tax hikes or spending cuts appear to be a long way off implementation and when they finally take effect the riposte is that the decision was made a long time ago.

A third reason for there being few surprises in the budget is that the state of the public finances continues to constrain the UK government. Nevertheless, it is disappointing that there is no concerted effort to borrow for investment particularly in infrastructure.

Budget aficionados cut through much of the verbiage and look at the tables in the budget Red Book which set out the changes to revenue and expenditure arising from the detailed budget measures. This year what is confirmed is that, while there are many smallscale measures, there are few which have a major fiscal impact in the short to medium term. This is not unexpected given that the Chancellor has pursued a consistent policy since 2010, even though the key outcomes such as eliminating the budget deficit are well behind the timetable set out in 2010 and he has had to announce additional cuts in public expenditure. The latest forecast from the Office for Budget Responsibility projects that there will not be a budget surplus until 2018.  This is many years later than originally planned.

Stepping back and taking a longer term view, the strategy of eliminating the deficit by cutting public expenditure and increasing taxes has been blown off track by lower than forecast growth. Tax increases accounted for 20 per cent of the planned deficit reduction and these have been implemented. Public spending cuts accounted for the balance and many of these are yet to take place. That the recovery has been slower than planned is a function both of the Chancellor’s policies and international events such as turbulence in the Eurozone and more recently weakness in emerging markets.  However growth now appears to have returned with UK GDP expected to grow by 2.7 per cent this year, slowing down marginally to 2.3 per cent in 2015 and then growing at ~2.5 per cent a year.

One of the paradoxes is that while growth over recent years has been very low employment has shown a much better picture. In Wales, between the first quarter of 2010 and the third quarter of 2013 the number employed in the private sector grew by 100,000 and the number employed in the public sector fell by 22,000. Public sector employment fell by 6.2 per cent in Wales compared with a fall of 7.7 per cent across the UK. However, more job losses in the public sector in Wales are to be expected as spending cuts are implemented.

In the private sector employment in Wales grew by 10.9 per cent compared with growth of 8.3 per cent across the UK. Of course, such statistics do not show the nature of the jobs created or lost and whether they are full time or part time. It is known that the number of people in Wales who are underemployed in the sense that they would like to work more hours has increased from 110,000 in the first quarter of 2010 to 150,000 in September 2013. The numbers occupying jobs for which they are overqualified are not known.

Nevertheless, it is remarkable that at the end of 2013 for the first time there were over one million people in Wales employed in the private sector. Unemployment in Wales now stands at 6.7 per cent compared with 7.2 per cent for the UK. A key question that needs to be answered is the nature of the new jobs. Are they part time and low paid or are they spread across the earnings spectrum? One concerning issue is the slump in productivity in recent years. As employment picks up will productivity improve as well? This is a crucial issue because ultimately productivity determines competitiveness and earnings.

One of the budget measures that will have a significant impact on manufacturing industry in Wales is cutting energy costs, in particular for energy intensive companies such as Tata Steel in Port Talbot. No doubt the measures regarding carbon credits and feed in tariffs will be criticised by those concerned with climate change: they will question the trade off between employment in energy intensive companies and global warming.

Other modest but helpful measures for manufacturing industry were announced and, given Wales’s higher dependency of this sector, they are to be welcomed. The annual investment allowance of £250,000 has been extended to 2015 and increased to £500,000. This represents a short-term injection of £2 billion into UK manufacturing industry.

In terms of funding industry it was noteworthy that little mention was made of banks except for some populist measures to use the proceeds of fines imposed on banks for some good causes. No mention was made of the failure of banks to fund small and medium size enterprises. Measures were announced to encourage exports, both by doubling the funds available for export finance and expanding UK Trade and Industry. It is to be hoped that the Welsh government will help Welsh companies in exporting more by being more proactive than in the past in facilitating cooperation with this organisation.

In the realm if industrial strategy the establishment of an Alan Turing centre for big-data was announced as well as support for a centre for the commercialisation of graphene. One suspects that neither of these centres will be located in Wales where investment in research and development trails badly behind other parts of the UK.

A measure well trailed was the decision to increase the tax free allowance to £10,500 in April 2015. While this will benefit the majority of income tax payers it will not help those earning between £8,000 and £10,000 a year. It is a pity that the policy advocated by the Institute for Fiscal Studies of raising the employee’s National Insurance Contribution level to £10,000 was not adopted. This would, have meant that those in work but on very low earnings (between £8,000 and £10,000 a year) would not have to pay the 12 per cent contribution. It makes sense to align the thresholds for income tax and employee’s National Insurance but one suspects that the Chancellor and his Lib Dem colleagues were keener to court popularity by opting for another increase in the income tax threshold. In the realm of income tax the threshold at which the higher, 40 per cent rate becomes payable is increased by 1 per cent both this coming year and in 2015.

 

The most radical measures in the budget are with respect to savings and pensions. The changes to ISA rules and limits are aimed at encouraging savings which are very low in the UK. Pension savings are made more attractive by offering people at pension age greater flexibility in how they make use of the savings they have accumulated. As so often the devil will be in the detail but not obliging members of defined contribution schemes to purchase unattractive annuities is a welcome initiative.

 

A measure already announced is the cap on the welfare budget. Traditionally public spending on welfare has not been capped but has been needs driven. This is now due to change. From 2015-16 the total welfare budget will be limited, initially at £119 billion for the UK as a whole, irrespective of need. This is likely to have a material impact on those dependent on welfare and on our more deprived communities.

 

It is a sign of the times that,, in the budget Red Book, Scotland has a whole section ‘Scotland in the UK’ devoted to it. On the other hand Wales has a single paragraph which simply sets out the UK government’s existing position whereby certain tax and borrowing powers are to be devolved.

 

What will be the wider political impact of the budget? The signs of economic recovery over the last twelve months have restored Conservative confidence. If the bounce back is maintained over the coming year they must hope that the ‘feel good factor’ will put them in a strong position as they approach the May 2015 UK general election.  Later this year it is expected that earnings growth will exceed inflation for the first time since 2010. The message will be that voters continue to face several years of tough economic conditions but ‘things can only get better’.

 

For Labour in the UK general election the challenge will be to rely on the economic bruising that people have experienced over the last four years and hope that this can be blamed on the current UK coalition government rather than there own mismanagement of the economy in the run up to 2010. The cost of living issue which Labour exploited so successfully last year may not be such a potent message by May 2105.

 

What of Wales? Will the Welsh Government be able to take advantage of some of the measures in the budget particularly with respect to business? If employment continues to rise should the focus shift to higher value added employment rather than simply more jobs? It is noteworthy that a number of measures in the budget such as a new garden city in Kent and efforts to contain house prices in London will have little or no relevance to Wales. Increasingly we will need to look at the National Assembly and the Welsh Government to take the initiative. In the case of Wales where most voters receive their information from London based newspapers and television the contrast between their own experience and that being projected in the London based media may give them pause for thought both regarding the success or otherwise of the UK government and of the Welsh Government in reinvigorating the Welsh economy.

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Eurfyl ap Gwilym is Plaid Cymru’s economics adviser and an IWA trustee.

2 Responses to:“Welsh private sector jobs pass a million”

  1. John R Walker says:

    How many of the private sector jobs in Wales are actually public sector jobs re-packaged in not-for-profit companies then notionally moved from the public sector to the service sector?

    Keeping fuel and alcohol taxes down should help the cost of living in Wales no end – should help to keep all the part-time bar-staff and waitresses with a degree in work as well…

    The Tories ongoing failure to bring Inheritance Tax into line with current house prices will not have gone unnoticed, nor the failure to offer investors a worthwhile and simplified Capital Gains Tax allowance. Though Osborne’s hands seem to be partly tied behind his back by the Lib-Dems it won’t stop more victims of these unfair taxes from voting UKIP.

    I guess we will have to wait ’til next year for the real election give-away budget liberally spread with Tory jam-tomorrow IF they get back in…

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  2. John Winterson Richards says:

    Honestly, the statistic about the scale of private sector employment in Wales, and the shift from public sector employment, is very surprising. However, since everyone knows better than to doubt Dr ap Gwilym when it comes to statistics, it should be welcomed as good news.

    There is no avoiding some footnotes. It should not be forgotten that we are starting from a relatively low base. Our private sector is still underdeveloped. The lack of R&D in Wales mentioned by Dr ap Gwilym is just one reflection of the longstanding weakness that such business as exists here is ‘back office’ rather than successful indigenous enterprise. Wales still has a long way to go.

    John R Walker also raises a legitimate question: when is a private sector job not a private sector job?

    As for the future, Dr ap Gwilym, following Plaid policy in general, probably invests too much hope in the potential of infrastructure. The recent debates about HS2 have shown that the broader economic benefits of grandes projets are often exaggerated. The EU has funded a lot of roads leading nowhere – including more than a couple in Wales.

    He is on firmer ground calling for the NI limit to be raised. It is hard to imagine anything that could do more both to encourage business to establish new posts and those on low incomes to seek them. It would be a hammer blow at the poverty trap. Alas, governments of all stripes have always treated NI as a stealth supplement to income tax and are likely to continue to do so in future.

    For most people, this year’s budget was a non-event, but overall Mr Osborne deserves credit for a solid defensive innings on an unfavourable wicket.

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