New inflation statistics for the UK were released this week showing that prices rose by 6.7 percent in the year to September 2023, the same rate as August 2023. Expectations were for the rate to fall slightly, and this apparent stickiness will no doubt fuel concerns about the extent to which inflation has become embedded within the economy (where price rises lead to upward pressure on wages, which has to be funded by price rises, and so on and so forth). The Bank of England faces a difficult balancing act, yet again, in doing what it can to get inflation closer to its 2% target without doing too much damage to other parts of the economy, particularly the labour market.
In terms of the details, food prices did actually fall in the year to September, which will certainly be good news for consumers if not for producers. Petrol prices however rose.
September’s inflation is an important one as it is usually used as the benchmark for the uprating of social security benefits for the following financial year (2024/25). In Scotland, for the ‘devolved’ benefits (disability and carer benefits), uprating by the UK Government will lead to an increase in the block grant to allow for the equivalent uprating of the equivalent benefits north of the border. For the Scottish Child Payment, which is a Scottish Government top-up to Universal Credit, there will be no such increase and the Scottish Government will need to find the money for any uprating from its own budget. Anything other than an inflationary uplift would be hard to justify.
Labour market statistics
Earlier this week we saw the ONS taking the unusual step of delaying the release of the usual Labour Force Survey (LFS) data due to concerns over the accuracy of the figures. This follows a notable divergence of data from the LFS from other labour market statistics (such as PAYE data and the ONS’s Workforce Jobs data) since the pandemic. We won’t have to wait long to find out the rationale for the delay – they are due to publish the statistics next week instead.
The ONS data did release, as planned, other non-LFS statistics on the labour market. The big news here is that year-on-year pay growth is outpacing inflation, meaning real terms growth in earnings – on average. Elsewhere there are indications that the labour market is cooling, with tax (PAYE) data pointing to a fall in the number of employees on payroll and a fall in vacancy numbers.
A bit more on the Council Tax freeze
Earlier this week, we published a summary of the fiscal implications of the surprise announcement by the First Minister at the SNP conference of a Council Tax freeze. We’ve crunched a few more numbers to look at what this means for households (all figures based on the IPPR Tax-Benefit Model).
For this analysis, we’ve split the population into 10 equal-sized groups (deciles), ranked by income. Households in the lowest Decile 1 have the lowest incomes, those in Decile 5 have average (median) income, and those in Decile 10 have the highest incomes. We’ve assumed, as we did earlier this week, that Council Tax would have risen on average by 5% in Scotland, the same as last year, in the absence of the freeze.
Firstly, how many households in each decile will benefit from the freeze?
According to the model, almost 100% of households in the top income decile will save money, but only around 70% in the poorest decile will benefit. This is because the the poorest households in Scotland are covered by the Council Tax Reduction scheme, and pay no Council Tax as a result. Chart 1 shows how this plays out through the whole income distribution. It may seem counter-intuitive that some people at the higher end of the income distribution receive Council Tax Reduction, but this is part of the design of the scheme that counts other factors, such as disability status, along with income.
Chart 1 – Number of households benefiting from the freeze by income decile
What does it look like in terms of money saved by decile?
Chart 2 shows the absolute savings by household income decile. Again, we see that those in the top decile benefit the most. This is because people in the higher income deciles tend to (but not always) live in homes in higher Council Tax bands. If Council Tax was to rise, they would pay a higher additional amount than those in lower Council Tax bands, and hence they gain the most due to the freeze.
Chart 2 – Absolute savings in 2024/25 due to the Council Tax freeze by income decile
This is not to say that the freeze won’t be very welcome for some households, and proponents of the freeze will point to the fact that although the biggest absolute savings accrue to higher income households, relative to income, those on the lowest incomes benefit the most. Chart 3 shows this is indeed the case.
Chart 3 – Savings in 2024/25 due to the Council Tax freeze by income decile as a proportion of household income
Overall the savings for households are relatively low whichever way you cut it and are unlikely to have an much of an impact on poverty rates for example. It’s unlikely that the decision to freeze Council Tax will have been analysed fully for value for money by civil servants because the announcement was made at Conference, and therefore is a party political decision outwith the normal government policy making process. There are questions over whether the £148m that we think the freeze will ‘cost’ could have been better spent elsewhere, particularly when faced with the current perilous fiscal position. We’ll have to wait until the Scottish Budget to try and work out where the money for this announcement, and the others made at Conference will come from.