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Good afternoon. Welcome to the final edition of State of Britain for 2024, a year of momentous elections that leaves the UK and the US on divergent political tracks, with a managerialist entering Downing Street and a “madman” back in the White House.
As has been widely acknowledged even by the government’s supporters, it has been a rocky start for Sir Keir Starmer who has struggled to make the political weather despite winning a huge majority in Westminster last July.
The worry is that the prime minister’s first five months in office may prove to be the calm before the storm. Starmer has a record of growing into jobs, but he’ll need to find his feet fast in 2025 as Trump moves to force a peace settlement in Ukraine and threatens to start a trade war with Europe.
Domestically, for all the noise around Sue Gray and freebies, the most consequential decision of 2024 was Rachel Reeves’ Budget, which hit business and consumer confidence much harder than the Treasury anticipated and will continue to reverberate in 2025.
Business has made its displeasure very clear, partly through the megaphone of the CBI, but somewhat overlooked in this debate is how increasing employers’ national insurance contributions (NIC) will hit the so-called third sector of charities and voluntary organisations.
Charities’ dual role
It’s not always well understood that charities are not a peripheral nice-to-have. In post-austerity Britain, they play an important dual role, both delivering public services under contract with local authorities and operating as a backstop when public services fall short.
The National Council for Voluntary Organisations, which represents some 17,000 charities, says the sector delivers £17bn worth of contracted public services every year, while also providing a safety net to the poorest — all without any public funding.
At the time of the Budget, the NCVO and other charitable groups — which unlike the public sector are not exempted from the NIC rise, even though they provide public services — warned that this would lead to cuts in services.
The NCVO wrote to Reeves asking for an exemption. It warned that the NIC rise would cost the sector £1.4bn at a time when charities were already being squeezed by rising costs (food, energy, wages) that were not reflected in fixed-term government contracts. This would leave charities, in effect, subsidising the government over time, the NCVO said.
Reeves wrote back, turning down the request for an exemption, and argued that since many charities were small, they would be protected by the government’s decision to double the employment allowance to £10,500, which allows businesses to employ the equivalent of four full-time workers on the national living wage without paying NIC.
However, the NCVO argues that the government has actually underestimated the impact of the NIC rise on the sector because it based its calculations on a sector median wage that was skewed by the number of smaller charities offering lower salaries.
The frontline services at risk
If it all seems rather abstract, I suspect it soon won’t. Charities are already warning that the impact will be felt on the frontline in the form of reduced headcount, lower salaries and, ultimately, scaled-back services.
Mencap, which helps people with learning disabilities and employs about 7,500 people, says the NIC rise will add £5mn to its salary bill, putting about 60 of its services at risk. The burden of replacing those services will ultimately fall on local authorities.
Another charity, Change Grow Live, the largest third-sector provider of drug and alcohol services in the UK, also estimates it will pay an additional £5.2mn in employers’ NIC, money that will have to be found from somewhere.
Again, this is not just “nice to have”. Change Grow Live supports more than 200,000 people battling drug and alcohol problems. When it reduces services, the burden of replacement will fall on the NHS and criminal justice system.
These are the big guns, but there are also plenty of smaller charities (still big enough to be captured by the NIC rise) that deliver services such as counselling survivors of domestic and sexual abuse and taking the strain off creaking public services.
That’s before you get to the less “frontline” charities such as the Youth Hostels Association. It was hammered by Covid-19 lockdowns that led to losses of £70mn, which were eased by selling hostels and taking on about £20mn in extra debt.
As a hospitality operation, the YHA has a large labour force, about half of whom are on the living wage, which has risen 40 per cent over the past five years. The group had a recovery plan in place to heal a £5mn to £6mn annual operating deficit by 2026, but the Budget has added £1.75mn to the YHA’s cost base, of which £850,000 it says was “entirely unexpected”.
In short, the NIC increase wasn’t just a tax on “big business”, but a measure that will have secondary effects that cut across public services. So if you have a favourite charity and can spare them a few bob this Christmastime, now might be the moment to increase/set up that direct debit.
They’re going to need the cash!
Britain in numbers
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This week’s chart comes from a report on the impact of the EU-UK Trade and Cooperation Agreement that was published by economists at the London School of Economics — you can read it in full here. Fair warning, it contains a lot of equations.
The headline finding, rather cheeringly, was that the TCA has not hit trade as hard as many forecasters predicted because larger companies adapted to the extra red tape, even though about 16,400 businesses quit exporting altogether.
In terms of numbers, the LSE estimated that UK’s total exports and imports fell 6.4 per cent and 3.1 per cent, respectively, between 2020 and 2022, compared with “what might have been” if the UK had remained in the EU.
This is where it gets complicated, since the “hit” to UK trade is calculated relative to a counterfactual — so the extent to which trade has diminished depends on how well you estimate un-Brexit Britain would have done if the UK had stayed in the EU single market.
The LSE study was based on firm-level data from HM Revenue & Customs between 2020-22, which is empirical data, but that has the effect of limiting the analysis only to those businesses that were trading, taking into account the hit from smaller companies that quit.
Other analyses, such as those by Jun Du at Aston University, take a broader approach and measure the impact on all companies, not just those that maintained trade with the EU and the rest of the world, and come up with larger hits to trade.
If you’re not an econometrician, these things can be hard to conceptualise. I’ve been grateful this week for the patience of several economists who’ve helped me try.
John Springford, at the Centre for European Reform, says that by comparing Britain’s trade with the EU to that with the rest of the world, the LSE paper pinpoints one Brexit effect — the barriers imposed directly by the TCA.
But that doesn’t capture secondary impacts, such as the Brexit hit to investment in manufacturing plants or UK-based companies setting up plants in the EU and the slowdown in UK economic growth after the referendum, which also curbed the growth in trade.
Or as Nicolò Tamberi, an economist at the Centre for Inclusive Trade Policy at Sussex university, explained, the LSE paper spoke directly “about how TCA affected bilateral trade costs” but did not capture its wider effects. As he wrote in an email:
“If instead Brexit had other aggregate effects on the UK’s economy, such as reducing GDP (e.g. because grim expectations for the future lead to fewer investments), then the country will be trading less with everybody, independently of the destination. This kind of effect is not captured by the EU vs non-EU comparison.
“The comparisons done by Jun Du and others would capture this overall effect. At the same time, that approach might be attributing to Brexit anything that has to do with the UK and so it might overestimate the Brexit effect.”
As Michael Gasiorek, at the UK Trade Policy Observatory, also observed, “there is no ‘right’ way of doing” this, not least because, as the LSE report noted, there really isn’t much historical literature to go on: most trade deals bring economies closer together; Brexit did the reverse.
All of which means it’s going to keep the economists busy arguing among themselves for a good while yet.
An appeal for common sense . . .
Speaking of charitable donations, I noted this week that more than 65 MPs and peers have written an open letter asking the Economic and Social Research Council (ESRC) to reconsider its decision to stop funding the UK in a Changing Europe (UKICE) think-tank next year.
Regular readers will know that I’ve frequently relied on its work to make sense of the Brexit fallout and it does seem like a rum decision to be cutting funding to an organisation that does so much to inform the debate on Europe, just at the point that we’re “resetting” relations.
UKICE boss Anand Menon tells me that while grateful for a decade of ESRC funding, it’s not quite “game over” and that he’s actively “exploring possible alternative sources of funding”, which I think is a polite way of saying he’s rattling the tin for donations.
Good. If anyone out there is looking for a valuable and useful project to fund, they could do a lot worse.
The State of Britain is edited by Gordon Smith. Premium subscribers can sign up here to have it delivered straight to their inbox every Thursday afternoon. Or you can take out a Premium subscription here. Read earlier editions of the newsletter here.
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