Andy Burnham and John Healey have spoken at length about efforts to provide “breathing space” to both households and businesses. This task at next week’s Budget has now become more difficult.
Over the summer the jobs market continued to weaken. Workers are at risk of being worse off while job seekers are finding it harder to secure new gigs and hiring appetite cools.
Including bonuses, wage growth continued to slow, falling to 3.7 per cent. When bonuses are excluded, the annualised growth in average weekly earnings remained at the lowest level in six years.
These earnings are partly satisfactory to the Bank of England, which worries about a spike in wages fuelling higher prices set by firms. Although they remain far lower than public sector pay settlements, private sector earnings growth is at a level consistent with the Bank of England’s target to reach two per cent inflation in the medium term.
However, what might worry the government more than it does the Monetary Policy Committee is the narrowing growth of wages in real terms. Annual pay growth adjusted for inflation was 0.6 per cent, far lower than the levels of over two per cent seen when Labour was elected into power in mid-2024.
This pay squeeze is at the nub of the cost of living pressures that Healey is concerned about.
Thomas Pugh, chief economist at the consulting firm RSM UK said it was “extremely likely” that private sector workers were set to take a “real terms pay cut” in the coming months as inflation rises higher above three per cent.
“That will intensify the pressure on Burnham and Healey to come up with a package to support the cost of living in the Budget next week,” Pugh said.
The challenge Healey has, which is not particular to this chancellor, is that he has little room for manoeuvre. His fiscal headroom is projected to have been halved to around £12bn. Healey has ruled out some revenue-raisers in the forms of a capital gains tax hike. A banking tax is expected to be the main new generator of income for the Chancellor.
Pugh said the “most likely course is a series of temporary measures designed to blunt the worst of the coming rise in utility bills and inflation, without affecting the fiscal headroom in 2029-30”.
Healey’s unemployment boost
Healey has something to celebrate. The unemployment rate dropped to 4.7 per cent in the the three-month period between June and August. That fell from a rate of 4.9 per cent previously. Some economists in the City had warned that the unemployment rate was on an upward trajectory, rising to as high as 5.7 per cent in the coming months.
While joblessness levels could yet rise as a result of cost pressures biting business owners, the lower rate in unemployment, coupled with a slight rise in wage growth, could provide some reprieve to the Chancellor.
“The Chancellor may also have more room for manoeuvre in next week’s Budget than previously feared,” WPI Strategy economist Martin Beck said.
“Stronger-than-expected growth and inflation-boosted tax receipts could limit the need for significant tax rises, potentially creating scope for targeted measures such as cutting employers’ National Insurance contributions for younger workers.”
Beck added that the UK economy was not in the midst of an “employment crisis” and rather the jobs market was “stuck in the slow lane”. It may be in the government’s powers to get it firing again.