Much to like in the Autumn Statement – This was the first budget for some time that looked to support business and we particularly welcome full expensing for capital allowances becoming permanent and the initiatives to increase investment in private high-growth companies.
But – There was nothing of note to address the de-equitisation of the UK equity market. This is a vital part of the UK economy, which supports businesses as they grow and builds investments for a wide range of pension funds, charities and individuals.
Let’s talk about inflation – Bringing down inflation is a key theme for the government and there was plenty of commentary that the budget was about growth without stoking inflation, which was largely supported by the OBR. This is incorrect. The Statement was inflationary, with the greatest impact coming in areas where the biggest problems have been, such as food.
We will now explain why and what the Chancellor should do to mitigate the impact.
The increase in the National Living Wage (NLW) will be materially inflationary given that a large proportion of employee pay levels will be directly or indirectly linked. A good example of this is in the food industry. For a typical large producer of chilled food that has around 15,000 employees and a wage bill of c.£500m, the impact is likely to be as follows:
• The majority of the employees will have a salary linked in some way to the NLW. Assuming an overall increase of 7%, this would add £35m to the wage bill (taking into account a lower increase for higher salaried employees).
• On top of that, they will have c.2,500 agency staff, whose costs will go up by c.£10m.
• On top of that, their suppliers will have to increase the wages of their staff, which would add another c.£20m.
• This £65m will be passed on to customers, which will be an effective price increase of >3%. This includes any inflationary increase from raw material price movements or higher energy costs.
• In addition, wages amount to around 10% of costs for food retailers, so they will need to increase prices by a further 1% to cover their cost increase.
So combined, this means a minimum of 4% price increases to come through next year in food prices, which is on top of record inflation this year. This puts further pressure on consumers and means that inflation will stay higher for longer.
There are many other sectors where wage increases are effectively set by the NLW, for example in retail, healthcare, hospitality and leisure and construction. In the private sector, there are 4.9m people employed in wholesale & retail, with 2.5m in accommodation and food service, 2.1m in construction and 1.8m in healthcare.
The OBR has increased its inflation expectations for 2024 and the news in the Autumn Statement makes even this look challenging.
Limiting the impact
The increase in the NLW should improve the standard of living for many of those that need it most and delivers on the recommendation that it equates to two thirds of median hourly pay. The problem is that it is also inflationary, not really due to the increased spending power, but because of the impact on the costs of a very wide range of businesses. This will ensure inflation remains higher for longer and joins energy prices (+5% in January) in going in the wrong direction.
We believe a straightforward way to address this issue is to reduce NIC for employers. This can be done either through increasing the allowance (currently £175 per week) or reducing the rate (currently 13.8%). This would have the benefit of reducing the impact on employee wage costs whilst still increasing wages. It would also encourage companies to expand through reducing the cost of employing people. In the 2022 Autumn Statement, the Chancellor stated that the threshold for employer NIC would stay at £175 per week through to 2027/28, which of course means there is a large tax increase as wages increase. If the Chancellor announced a change in early 2024, that would be soon enough to limit the price increases required to offset the rise in the NLW, which goes up from April 2024.
Here is the letter from the Low Pay Commission regarding its recommendation.
Here is the summary of the Autumn Statement.