The UK Budget and growth – an adland view

I was asked for my views on the impact of the UK’s long-awaited budget – the first since the new Labor government. This is an important fiscal event in the UK as it sets the tax, spending and borrowing regime for the year ahead. And even though it was a few weeks ago, the conversation is still very much alive because this budget is trying to achieve something (namely jump-start the UK’s lackluster economy). The result is winners and losers. Much of the focus in adland has been on raising taxes on businesses like ad agencies and clients, but in a typically myopic way, not on the lives of the people who really matter – our clients’ customers. This piece attempts to set the record straight.

Good things come to those who wait, and in the case of Budget, the wait was longer than having to watch both Dune movies back to back. We made it through the wait, so it’s good?

Some acronyms like IMF say “yes” and others like OBR say “not so much.” So let’s look at the budget from an overview.

There is only one way the industry should assess the Chancellor’s plans: are they good for growth? Black holes need to be filled, children need to be rescued from poverty and our public services need life support. But we can only do that with a growing economy.

There’s a lot of old nonsense about growth, but there’s no point in inventing new technology, innovating, hiring new employees, building new production facilities or opening new stores if people can’t buy what you’re offering. In fact, as economist Steve Keen reminds us, new investment and employment are much more likely to come from businesses having more customers than from more profits.

Growth is driven by people, not products. And the secret to a thriving economy is very simple – lots of people with a little more money. For this measure, we should consider the budget necessary, but not sufficient. Despite being described as the most dramatic economic event of recent years with taxes, spending and investment, it is actually rather timid.

Nothing happened with taxes on earned income – income tax and employee national insurance. There is no reduction in the historically high tax burden on the splitters in this country – our clients’ customers. A reduction in the fiscal drag will be welcome as tax thresholds rise in line with inflation, but this does not start until 2028. When it comes to removing the financial burden of childcare to improve early childhood productivity and outcomes, we have free breakfast clubs and funding to the previous government extended childcare hours, but no radical change to how we support working parents.

Taxes on unearned income have the power to release accumulated wealth and recycle it back into the economy to fuel growth, but we’ve seen very little movement here, and certainly nothing close to equalizing the taxation of earned and unearned income. The top rate of capital gains tax rises from 20% to just 24% and there is not even the slightest whiff of a proper wealth tax.

This means that the increase in the minimum wage just before the real living wage is incredibly significant, representing a 16% increase for younger people. There is no doubt that this will have a significant impact on spending for our clients, although it will benefit the less affluent, who tend not to be their most valuable customers.

Public services should get more money, but not much. £25.2 billion more is promised for health, but at £6 per person per week this will only be enough to keep the rot from getting worse. That’s a shame because spending on health is a powerful boost to the economy given that it’s such a large employer, and better health outcomes bring people back to work. Housing will go up a bit, but that won’t combat asset inflation, which is making better homes or homes more expensive for people. And the picture is similar in many public services with an average increase of 1.5%. Of course, education benefits a bit from closing the VAT gap on private schools.

Changing the fiscal rules to treat capex differently than debt used to finance operating deficits is long overdue. This will enable direct government investment in growth categories such as aerospace, life sciences and biotechnology, along with the creation of Great British Energy. This is a government that is acting in a muscular way to secure the world class industries on which the nation’s future depends with the employment and trade balance benefits that come with it.

All this leaves the elephant of national insurance – the employer’s – on the table. The impact of an increase to 15% on people’s wages and employment is difficult to estimate. Employer groups and the Office for Budget Responsibility have a mixed view over the medium term. But the reality may be very different in the longer term and, frankly, it is difficult to find an alternative source for such a significant part of the revenue – £25bn over the forecast period. This seems to have been the least bad choice for the chancellor, especially without his greater focus on capital gains, accumulated wealth and legacies.

This is a budget that offers some hope to the customers we serve, but I suspect few people will see much of a change in their income beyond the minimum wage. It makes careful decisions and puts less strain on public services than we feared. But we are far from out of economic shit, and we will have to wait even longer to see if this government delivers the growth it has promised again and again.

Image with permission Chris Boland

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