With unemployment high, the Chancellor must protect businesses at the Budget

Emeritus Professor Joe Nellis is Head of Economic Research at MHA, the accountancy and advisory firm.

The UK labour market is continuing to struggle, despite the upbeat message from the Chancellor last week that the economy is beginning to ‘turn the corner.’ Unemployment remained at 4.9% in the three months to July, while annual growth in regular earnings, excluding bonuses, held at 3.5%. Most concerning, however, is youth unemployment, which remains exceptionally high at around 15%.

Decisions made by the Government in recent Budgets have increased business costs, particularly employment costs, leading many businesses to become increasingly cautious about expanding recruitment. As a result, the number of job vacancies has fallen substantially over the past year. The new Chancellor must not hit businesses hard at October’s Budget, otherwise he risks weakening the jobs market and discouraging corporate investment even further.

The hiring of young people has been especially disincentivised and the situation facing younger workers is a cause for concern. Youth unemployment has risen steadily in recent years and is now more than three times the overall national unemployment rate, with the increase in the national minimum wage and NICs exacerbating long-standing issues in the labour market. This situation could become a longer-term structural problem if young people entering the workforce don’t get sufficient opportunities to acquire the necessary skills and experience to kick-start their careers.

Another complication ahead of the Budget is that a weakening labour market means slower growth in income tax and National Insurance revenues, while at the same time potentially increasing the total welfare budget, leaving the Chancellor with reduced fiscal headroom as he looks to balance the books.

For the Bank of England, moderation of wage inflation over the past year has taken some steam out of domestic inflationary pressures and strengthens the argument that short-term inflation has not become structural yet. Yet Thursday’s interest rate decision is in the balance -will those who continue to see inflation as transitory prevail, with interest rates being held, or will policymakers have seen enough to convince them that inflation is here to stay and a rate hike is now necessary?

Among its UK locations, accountancy and business advisory firm MHA has offices in Edinburgh and Aberdeen.

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