Stronger public finances weaken government’s stance on pay, IFS says ahead of budget

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2 years ago

February 28, 2023

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The government is set for a fiscal windfall of tens of billions of pounds thanks to stronger growth and lower energy prices, making the argument not to contribute to higher public sector pay all the more difficult to maintain, according to the Institute for Fiscal Studies (IFS).

In an analysis released ahead of the 15 March budget, the IFS said that it expected the government to borrow around £30bn less this year than it had forecast in November.

While around £6bn of this is likely to be spent on another freeze of fuel duty, this would still leave borrowing nearly £25bn lower than previously expected.

The IFS said that with the gap between public and private sector pay having widened considerably during the recent spike in inflation, “it is difficult… to see an end to public sector pay disputes that does not involve the Treasury providing some extra cash to departments”.

It said that a CPI-matching 5.5% increase in pay across the public sector would cost around £5bn – an amount which was small compared with the recent underspend.

It added that while the government had argued about the inflationary consequences of higher pay, “this is not a strong argument”.

“Most obviously, the impact of injecting £5bn into an economy with an annual GDP well in excess of £2,000bn would surely be modest,” the IFS declared.

The IFS said that while economists had previously expected a sharp recession in 2023, those expectations had since changed, in large part because wholesale energy costs had fallen more than expected.

However, it warned that this short-term improvement masked a deeper problem: the UK’s long term growth potential remained disappointingly weak, raising questions about its ability to generate taxes in future.

Isabel Stockton, senior research economist at the IFS, said: “It is difficult to see an end to public sector pay disputes and industrial action that does not involve the Treasury providing additional funding to departments.

“Short-term improvements in the borrowing outlook could allow for one-off bonuses or backdated pay awards for public sector workers.

“But it is far from clear that these improvements will last and, if the Bank of England is right, the UK’s medium-term growth outlook may have deteriorated.

“Short-term savings cannot finance permanently higher spending – which is what a higher consolidated pay rise for public sector workers would entail.

“The chancellor likely has less fiscal room for manoeuvre than recent headlines might suggest.”

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UK long-term borrowing costs highest this century

Published

3 hours ago

January 7, 2025

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UK long-term borrowing costs highest this century

UK long-term borrowing costs have hit their highest level since 1998.

The unwanted milestone for the Treasury’s coffers was reached ahead of an auction of 30-year bonds, known as gilts, this morning.

The yield – the effective interest rate demanded by investors to hold UK public debt – peaked at 5.21%.

At that level, it is even above the yield seen in the wake of the mini-budget backlash of 2022 when financial markets baulked at the Truss government’s growth agenda which contained no independent scrutiny from the Office for Budget Responsibility.

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The premium is up, market analysts say, because of growing concerns the Bank of England will struggle to cut interest rates this year.

Just two cuts are currently priced in for 2025 as investors fear policymakers’ hands could be tied by a growing threat of stagflation.

The jargon essentially covers a scenario when an economy is flatlining at a time of rising unemployment and inflation.

Growth has ground to a halt, official data and private surveys have shown, since the second half of last year.

Critics of the government have accused Sir Keir Starmer and his chancellor, Rachel Reeves, of talking down the economy since taking office in July amid their claims of needing to fix a “£22bn black hole” in the public finances.

Both warned of a tough budget ahead. That first fiscal statement put businesses and the wealthy on the hook for £40bn of tax rises.

Corporate lobby groups have since warned of a hit to investment, pay growth and jobs to help offset the additional costs.

At the same time, consumer spending has remained constrained amid stubborn price growth elements in the economy.

Higher borrowing costs also reflect a rising risk premium globally linked to the looming return of Donald Trump as US president and his threats of universal trade tariffs.

The higher borrowing bill will pose a problem for Ms Reeves as she seeks to borrow more to finance higher public investment and spending.

Tuesday’s auction saw the Debt Management Office sell £2.25bn of 30-year gilts to investors at an average yield of 5.198%.

It was the highest yield for a 30-year gilt since its first auction in May 1998, Refinitiv data showed.

This extra borrowing could mean Ms Reeves is at risk of breaking the spending rules she created for herself, to bring down debt, and so she may have less money to spend, analysts at Capital Economics said.

“There is a significant chance that the Office for Budget Responsibility (OBR) will judge that the Chancellor Rachel Reeves is on course to miss her main fiscal rule when it revises its forecasts on 26 March. To maintain fiscal credibility, this may mean that Ms Reeves is forced to tighten fiscal policy further,” said Ruth Gregory, the deputy chief UK economist at Capital Economics.

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Growing threat to finances from rising bills

Published

9 hours ago

January 7, 2025

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There is mounting evidence that consumers are facing hikes to bills on many fronts after Next became the latest to warn of price rises ahead.

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Higher prices for 2025 as Christmas trading fails to meet expectations – BRC says

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15 hours ago

January 7, 2025

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Higher prices for 2025 as Christmas trading fails to meet expectations - BRC says

Shop prices will rise in 2025 as the key Christmas trading period failed to meet retailers’ expectations, according to industry data.

Shop sales grew just 0.4% in the so-called golden quarter, the critical three shopping months from October to December, according to the British Retail Consortium (BRC) and big four accounting company KPMG.

Many retailers rely on trade during this period to see them through tougher months such as January and February. Some make most of their yearly revenue over Christmas.

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The minimal growth came amid weak consumer confidence and difficult economic conditions, the lobby group said, and “reflected the ongoing careful management of many household budgets”, KPMG’s UK head of consumer, retail and leisure Linda Ellett said.

Non-food sales were the worst hit in the four weeks up to 28 December, figures from the BRC showed and were actually less than last year, contracting 1.5%.

What were people buying?

Food sales grew 3.3% across all of 2024, compared to 2023.

In the festive period beauty products, jewellery and electricals did well, the BRC’s chief executive Helen Dickinson said.

AI-enabled tech and beauty advent calendars boosted festive takings, Ms Ellett said.

What it means for next year

With employer costs due to rise in April as the minimum wage and employers’ national insurance contributions are upped, businesses will face higher wage bills.

The BRC estimates there is “little hope” of covering these costs through higher sales, so retailers will likely push up prices and cut investment in stores and jobs, “harming our high streets and the communities that rely on them”, Ms Dickinson said.

Separate figures from high street bank Barclays showed card spending remained flat since December 2023, while essential spending fell 3% partly as inflation concerns forced consumers to cut back but also through lower fuel costs.

The majority of those surveyed by the lender (86%) said they were concerned about rising food costs and 87% were concerned about household bills.

More info to come

Numerous UK retail giants will update shareholders on their Christmas performance this week including high street bellwether Next on Tuesday, Marks and Spencer and Tesco on Thursday and Sainsbury’s on Friday.