A corner turned, but very slowly

The Chancellor painted an upbeat picture in his Budget statement yesterday, with “growth up, jobs up and taxes down”. Certainly, after the significant difficulties of recent years, he was right to celebrate a turning of the economic corner.

In practice though, the economic and fiscal outlook set out by the Office for Budget Responsibility (OBR) was little changed from that in November at the time of his Autumn Statement. Overall GDP has performed a little less well in recent months than had previously been expected – hence the technical recession at the end of last year – but a quicker than predicted fall in inflation means the OBR now expects GDP to rebound a little more strongly in the months ahead. The upshot is a projection for 2029 (the end of the OBR’s five-year forecast horizon) that is almost precisely the same size as the organisation had previously projected. An economy heading in the right direction once more, but doing so quite slowly.

Adjust economic growth for population growth – an approach the Chancellor rightly declared yesterday to be a better reflection of living standards in the nation – and the recovery we’re entering looks slower still. On this measure, we’re not due to return to our pre-pandemic peak until the middle of 2025. By that point, GDP per person will be just 5.6% higher than it was on the eve of the financial crisis in 2008. To put that in context, consider that in the 17 years leading up to that date, GDP per person had grown by 44.7%. We used to think that was normal. The good news then is that we’ve got ourselves out of reverse. The bad news is we’ve got a lot of lost ground to make up.

Household incomes are likewise at a much-needed turning point – and one that is arriving two years earlier than had been projected at the Autumn Statement thanks primarily to a quicker than expected fall in global energy prices.

This easing of the cost of living crisis is again a moment to celebrate, but the bigger picture remains important. At its lowest point a little later this year, disposable income per person is projected to be £565 higher than at the time of the Autumn Statement. But it will remain £526 down on the pre-pandemic peak, and some £1,424 below what the OBR thought it would be in 2024 when it looked into its crystal ball immediately ahead of the pandemic. Wind the clock back to the financial crisis and a continuation of historically average rates of income growth would have left every one of us £8,245 better off today. That’s what more than a decade and a half of lost growth looks like.

A pre-election giveaway for some

The Chancellor’s flagship step to improve the population’s finances yesterday was a cut to National Insurance Contributions (NICs). The cut is worth £10 billion a year and will benefit millions of workers. In combination with the earlier NICs cut announced in the Autumn Statement, the average employee is set to gain to the tune of £900 a year.

Of course, it is being delivered alongside ongoing freezes in income tax thresholds which simultaneously act as a tax rise. Overall, we get a complex mix of winners and losers. Workers on middle and just above middle incomes are most likely to be net gainers, while lower and higher earners are still set to lose out overall. Those income tax rises have been in place for some time though, the NICs cuts haven’t. Relative to where we were this time yesterday, the Chancellor was in generous mood.

But not for all. By definition, the NICs cut does nothing for those not in work. And, in the short-term, the number falling into that category is expected to expand. The OBR projects that unemployment will rise in the coming months, peaking at 4.5% in the last quarter of 2024 before slowly falling back to 4.1% in 2028. The failure of the unemployment dog to bark as loudly as might have been expected over much of the recent past has been one of the economic success stories of the last decade, but that relative good news will be little comfort to the 1.6 million people expected to make up the unemployment statistics at the end of this year.

The NICs cut will likewise bypass the rising numbers of people who are economically inactive due to long-term ill health. Overall inactivity levels among working-age people reached an 11-year high of 9.3 million at the end of 2023, some 700,000 above pre-pandemic levels. Long-term sickness accounts for around one-third of the total, with that proportion rising rapidly in recent years. Where previously the OBR had expected a gradual reversion to the pre-pandemic norm, it yesterday baked in an expectation that these numbers will persist into the coming years.

The stickiness of inactivity and the increase in near-term unemployment cast shadows over the Chancellor’s sunnier outlook yesterday.

The Chancellor did provide some additional support for those at the sharp end yesterday, most notably an additional £500 million (including Barnett impact) to extend the Household Support Fund in England from April to September 2024 and an increase in the maximum repayment period on emergency loans taken out by claimants on Universal Credit, from 12 months to 24 months.

But the measures were small beer overall and are unlikely to do much to reverse the deepening challenges facing a significant minority across the country. That includes the 3.7 million adults who reported at the end of 2023 that they were only occasionally or hardly ever able to keep comfortably warm in their homes, the 2 million adults who said they had experience of running out of food and finding themselves unable to buy more, and the record 142,000 children across England living in temporary accommodation. And of course these challenges are frequently multiple and reinforcing. Consider for example that the economically inactive and those suffering from mental health conditions are around three times more likely to have reported running out of food and being unable to afford more, while people with a disability were twice as likely to be in this position.

Improvements in average incomes must also be set against the increased expenditure many households are facing this year to service their debts. Interest payments as a share of household income have been climbing since 2022, and the OBR is projecting further sharp rises over the next eighteen months. By mid-2025, households are expected to be apportioning 6% of their disposable income to interest payments; levels not seen since 2010.

Beneath these averages some will be facing significantly higher burdens. Low-income families are estimated to hold nearly £15 billion in unsecured debt and the cost of servicing this has increased over the past year to stand at £680 a year. Analysis suggests that a fifth of low-income families are taking on debt just to pay their bills and reports of debt issues are already on the rise, with Citizens Advice receiving nearly 10% more debt enquiries in January 2024 than a year prior.

The wider implications are significant: one in two adults with debt have a mental health problem, while those in debt are roughly three times as likely to report bad or very bad health, or to report low levels of life satisfaction.

Persisting with Austerity 2.0, but simply spending the money ‘better’

Contrary to the pre-Budget rumours, the Chancellor didn’t pay for his NICs giveaway by pencilling in any further cuts to departmental budgets (instead he funded about two-thirds of it via additional borrowing and one-third via offsetting tax rises). But nor did he respond to calls for any additional funds in this area to deal with creaking, and sometimes explicitly cracking, public services.

We got confirmation that there will be no Spending Review until after the next election, meaning we have detailed departmental spending plans in place for just the first of the next five years. That provides considerable uncertainty for those officials charged with spending the money, and it means the Chancellor didn’t have to specify quite where the implied axe of Austerity 2.0 will need to fall in the coming years.

Because an unchanged overall spending envelope will equate to significant spending cuts for many departments. Total day-to-day spend is assumed to grow by 1% a year in real-terms from 2025-26, but more generous promises for the NHS, schools, defence, overseas aid and childcare leave everything else (think housing, courts, prisons, further education and local government) facing implied reductions of 2.3% a year from 2025-26 according to the OBR (rising to 3.6% a year if the next government follows through on the current one’s stated defence and overseas aid ambitions). Population growth eats further into these plans, with the OBR stating that per person public service spending will be £630 (8%) lower in 2026-27 than had been anticipated when the spending plans were first set out in October 2021.

Yesterday’s Budget did include some welcome focus on boosting the efficiency of public service delivery, with the publication of a Public Sector Productivity Plan designed to deliver £1.8 billion of benefits by 2029 (supported with £800 million of pump priming). Putting effort and resource behind a shift towards digitisation and automation is a worthy ambition, and the government’s hope is that it could produce significantly larger savings over the longer term. But the more immediate reality is that it will make only a very minor dent in the estimated £20 billion of implied cuts facing unprotected departments by the end of the current five-year horizon.

And the pressures are no less severe in many of the ‘protected’ areas of spending. As of December last year, for example, 7.6 million adults found themselves on a waiting list for NHS treatment, more than the populations of Manchester, Birmingham, Leeds and Bradford combined. At the same time, a record breaking 1.9 million people engaged with NHS mental health services. Following years of challenges, the UK has fewer acute beds relative to its population than many similar health systems. There is also widespread evidence of a growing shortage of beds in the UK, with acute bed occupancy regularly exceeding levels of what is generally accepted as safe. High bed occupancy rates impact on planned and emergency patient care, while a lack of community and social care fails to enable patients to leave hospital when they are well enough to do so. The result is a health care system struggling to provide access to planned and emergency health care services in a timely manner.

Given this context, the Chancellor did offer extra support yesterday – an additional £2.5 billion to help NHS England “meet pressures in the coming year”. That’s just about enough to prevent any real terms drop in spending relative to 2023-24, and is likely to be one of a number of one-off top-ups that will be required in the absence of any more fundamental change in public services spending plans.

In practice, the wider departmental spending plans implied by the government’s current position are likely to be undeliverable for whoever wins the next election. Facing the prospect of having to deliver £20 billion of spending cuts alongside £19 billion of pre-announced tax rises, whoever is Chancellor at the next Spending Review will almost certainly need to set out a change of course.

The charity sector will inevitably step up, though from an already strained position

Against this backdrop of a slow recovery in living standards for many, a deepening suite of challenges facing a significant minority, and further cuts to public services, the charity sector can expect further increases in demand over the coming months. That demand is already elevated of course, as illustrated by Figure 3. It shows the number of referrals Citizens Advice makes each month to food banks and other charitable services.

Other data also points to dramatic rises in levels of food bank use. The Trussell Trust distributed around 1.5 million food parcels between April and September 2023, a 54% increase on the same period in 2021.

With demand already elevated and potentially still rising, it is encouraging to see the charity sector show signs of emerging from the worst effects of the pandemic and subsequent cost of living crisis. For example, charities of all sizes now feel more confident that they can handle the current levels of demand coming to them. This is even true of small charities, which have grown steadily more confident in their ability to meet demand since November 2022. Similarly, though there is not much breathing room in charities’ finances, there have at least been improvements reported over the last quarter.

In time, we might expect the OBR’s improved projections for household disposable income to flow through to higher income for charities too. This will, of course, be balanced against reductions in government spending and in associated grant and contract income, and PBE will provide an updated projection in the coming days once the OBR has published additional data on local government finances. Overall though, we’re likely to see a modestly improving picture – in line with what’s going on in the wider economy. But, just as in the case of the economy more broadly, the aggregate is likely to mask very different experiences across organisations, reflecting the very different ways in which charities raise their income.

There were specific bits of good news in the Budget for some charities, though they were limited in scale. For example, the Chancellor announced £45 million through the Medical Research Charities Early Career Researchers Support Fund to fund investigations into diseases such as dementia, cancer and epilepsy. However, this £45 million must be set against the £2 billion that charities are believed to have invested in medical research in 2022 alone.

An additional £5 million was also made available for the renovation of village halls in England, equating to a 3% boost in the total income for that sector. Pandemic tax reliefs for theatres, orchestras, museums and galleries were also made permanent - welcome measure to aid communities to continue to have access to world-class productions. It was perhaps all the more welcome given the rapid withdrawal of funding cultural organisations are facing in some local authority areas. As Birmingham's Repertory Theatre explained to BBC Newsnight for example, Birmingham City Council had effectively ended its culture budget ahead of yesterday’s Budget.

There was additional positive news for some smaller charities as the VAT registration threshold was raised from £85,000 to £90,000 from 1 April. This means more charities will be exempt from registering for VAT (though it does nothing to end the problem of organisations clustering just below the threshold in a way that can prevent organisational growth).

Ultimately, these small direct measures may be helpful for specific charities in specific subsectors. But for the majority of charities, the biggest impacts of the Budget will be around the wider economic and social picture – and crucially, what the Budget didn’t feature.

Local government barely featured in the Budget, but the funding challenge is all too visible

The events in Westminster yesterday felt miles away from the realities in town halls, where financial distress is deepening. Since their introduction in 1988, section 114 notices have only been issued 14 times by local councils, generally on the basis that a local authority believed it was unable to balance its budget. Yet, alarmingly, 12 of those 14 notices have been issued in the past six years, with half coming since mid-2022. And that is set to worsen. In a recent survey of senior council leaders and finance officers, just one in 4 (25%) respondents said they had confidence in the sustainability of councils’ finances and more than half said it was likely that they would issue a section 114 in the next five years.

While it is unclear whether this survey took place before or after the government announced that total funding to local government would rise by 7.5% in real terms in the next financial year, the financial situation remains stark. The LGA says that despite the extra income, the councils still face a £4 billion funding gap over the next two years.

The consequences for the charity sector are likely to be significant and will compound the long-term decline in funding from local authorities the sector has experienced. Between 2009-10 and 2020-21, income from councils fell by almost a quarter (23%), equating to a £13.2 billion loss over the period.

As cuts bite going forward, this fall is likely to continue. More than a quarter (28%) of charities that work with local government expect a decrease in funding from local government over the next year. As 13p in every £1 of charity sector income is currently sourced from councils and almost nine in ten charities (87%) that work with them say their connections with local authorities are important, this will matter significantly for the sector – and even more so for the people who charities work with. With cuts affecting services from libraries to social care, streetlights to youth work, the likelihood is that more need will go unmet. That will take the form of both growing numbers of people in need and an increasing complexity in the need that is presented.

The neglect of local government is emblematic of the weaknesses in a Westminster politics more interested in an oncoming election than in solving the big structural, social problems that the country is experiencing. Creaking public services, health and financial strains among particular groups continue to weigh the country down, lacking sufficient solutions. Many of the social issues that charities are wrestling with were either overlooked or touched on only with temporary measures. The country is emerging from the worst of the economic doldrums, and that is something the government can be pleased with. But now that it is, policymakers must focus on those untouched by the recovery, and the long-term change much of society needs. 

CC. The Chancellor Jeremy Hunt walks outside Downing Street with the Budget box. Photo by Zara Farrar / HM Treasury