Economy

How could a £1 pay rise leave you tens of thousands of pounds worse off? The answer is the childcare cliff edge in the UK tax system, which will get considerably steeper for higher-earning families from September. The government’s expansion of free childcare provision in England this autumn means that working families with children aged under three will be able to claim 30 hours of government-funded childcare a week on top of the tax-free childcare scheme. Valuable benefits, but the bulk of this entitlement is lost if one parent’s adjusted net income is more than £100,000 per year. This threshold, introduced in 2017 when the rollout of free childcare first began, has never been increased. As “fiscal drag” takes more taxpayers over the £100,000 cliff edge, parents are finding that a small pay rise can leave them substantially worse off. From September, a parent in London with two children at nursery who passed this point would need to earn more than £149,000 to compensate for the loss of childcare support from the state, according to new calculations by the Institute for Fiscal Studies — a pay rise of almost 50 per cent. The yawning gulf means high-earning parents are opting to limit their earnings by reducing their working hours or making outsized pension contributions to hang on to their childcare benefits.With hundreds of thousands more taxpayers forecast to cross the £100,000 threshold by 2028, experts warn the “behavioural response” from higher earners could have consequences for workplace productivity and economic growth — not to mention the growing complexity for families managing their finances. Although higher earners can use various methods to stay on the right side of the cliff edge, new parents simultaneously navigating the tax and childcare systems face a steep learning curve. Many FT readers in their 30s and 40s who responded to our recent call out said they were totally unaware of the complexity awaiting them. Working out how best to manage this varies hugely between families. FT reader Davina* works in finance, and has two children under the age of three in nursery. Although she earns a six-figure salary, it’s not high enough to compensate for the value of the childcare benefits she would lose. She has stayed under the £100,000 threshold by dropping down to a four-day week and paying her bonus into her pension. “This year, we are £250 per month better off as a result, although I know that going part-time has affected my promotion prospects,” she says. “I feel bad for complaining, as we aren’t poor, but we’re still spending £2,750 per month on childcare even after the government help, and the reduction in my take home pay means we can’t afford holidays or a car.”Cash flow pressures and rising mortgage rates mean some cannot afford to make outsized pension contributions to remain under the threshold. Rob* works in tech. Since his daughter was born five years ago, he has turned down two promotions that would have taken his pay over £100,000 as he could not negotiate a high enough pay rise to compensate for the loss of childcare hours. Eventually, he quit his job and became a contractor. “This is riskier, but my earnings have jumped to the point where it is worth it,” he says. “My wife and I have decided to have no more children to maintain the quality of life we have with the one.”From September, the expansion of free childcare in England is set to shift the financial equation again. The IFS calculates that a parent in London with two children aged under 3 at nursery would need to earn over £149,000 for their disposable income after childcare costs to be as high as one earning £99,999 (this assumes 50 hours of childcare per week at London’s median hourly cost, funded from their net pay). Outside of the capital, where the cost of childcare is slightly lower, the IFS says the break-even point would be around £137,000 for two children receiving 40 hours of support at England’s median hourly cost. And the situation can be even worse in other parts of the UK. In Wales the childcare threshold is based on gross salary, rather than net adjusted income, so salary sacrifice won’t help you avoid the cliff edge; in Scotland there’s no free childcare for most under 3s but no salary limit on the benefit for over 3s; and in Northern Ireland, while there are extra tax subsidies available on top of the UK-wide scheme, there is no free childcare for under 3s at all.Freezing tax thresholds has proved a powerful way for successive chancellors to increase the tax take without altering headline tax rates. Had the childcare cliff edge risen in line with inflation since 2017, it would now be over £130,000. However, high-earning parents face a second issue, as hitting a six-figure salary is also the point in the tax system where the £12,570 tax-free personal allowance starts to be removed. Individuals must pay a marginal rate of 60 per cent on the slice of income between £100,000 and £125,140, and 45 per cent above this level (note tax rates are higher in Scotland). This has become known as the six-figure salary trap as all too often, receiving an unexpected tax bill is how workers find out about its existence. Employees typically have to complete a tax return to pay what they owe, as it is too complex for the PAYE system to calculate and collect. Introduced in 2010, had the £100,000 threshold increased in line with inflation it would now kick in above £150,000. Currently, 1.8mn UK taxpayers earn enough to be impacted, but as thresholds remain frozen, the IFS estimates this could increase by 20 per cent to 2.2mn in the next three years, based on its analysis of OBR forecasts. As more taxpayers are dragged into these higher rates, the “distorting” effects of more workers attempting to avoid steep cliff edges in the system will be amplified. Common behavioural responses of working less or limiting taxable pay stand to have a greater economic impact as more taxpayers hit these limits. As well as running counter to the government’s growth agenda, this also raises the question of how much extra tax will actually be raised. “If people are turning away work, that’s in principle resulting in lower productivity and growth,” warns Dan Neidle, founder of the Tax Policy Associates think-tank. “There shouldn’t be hard thresholds that radically change people’s behaviour,” he says. “The best research suggests the revenue maximising tax rate is 55 per cent. That’s very close to the current top rates of income tax plus national insurance. But the abnormally high marginal rates at £60,000 [where child benefit starts to be tapered away] and £100,000 are much higher than this.”Increasing pension contributions is one of the easiest ways of reducing your adjusted net income (your total taxable income minus certain tax reliefs) under the £100,000 threshold. This is certainly tax efficient, but locking money up inside a pension until the age of 57 limits discretionary spending at a time when parents face multiple financial pressures. Sean* paid £55,000 into his pension last year to stay under the threshold, leaving his family on a very tight budget. His child’s nursery has just announced it will increase fees by £1,600 a year from April, citing the impact of higher employer national insurance contributions. “It just all seems so regressive as a policy,” he says. “At the moment, we have nothing left over at the end of the month,” says Verity*, a high earner with two children who has been making large pension contributions to stay under the threshold. “It’s like not having had a pay rise for six years when everything around you has increased; mortgage interest and monthly bills being the massive ones. On the flip side, my pension is looking pretty healthy, so I guess I’ll reap the rewards in 30 years.”The complexity of the financial calculations involved could yet boost one area of the UK’s services economy — more parents are seeking tax advice. “People typically want to know if there’s a magic number where it becomes worthwhile ‘pensioning down’ to reduce taxable pay,” says Philly Ponniah, a certified financial coach in London who offers group workshops and one-to-one sessions to help parents navigate the system. The answer will depend on “a huge number of variables” including precisely how nursery fees are calculated — a dark art in itself — if student loan repayments are still being made, and whether parents can afford to pay their rent or mortgage if they increase their pension contributions. If employers offer pension arrangements using Salary Sacrifice, it is relatively easy for workers to adjust their contributions. However, many companies only have a short “window” of a few weeks per year when changes can be made (in Ponniah’s experience, many HR departments will allow changes if staff ask nicely, but don’t want to advertise this). Using workplace salary sacrifice schemes to buy electric vehicles, electric bikes or additional annual leave entitlement to take salaries under the threshold are all commonly used. The situation is more complex for workers in defined benefit pension schemes. FT Money has spoken to parents working as NHS doctors who say they are turning down extra shifts to remain below the childcare threshold (see box). Other high-earning parents in the private sector said they had become self-employed, using a limited company structure to keep salary and dividend payments under the threshold, with a view to increasing these when their child started school.Single parents are stuck between a rock and a hard place. “You can have two people earning £60,000 a year who get everything, including full child benefit, versus one person earning £120,000 who loses their funded hours, child benefit and tax-free childcare,” Ponniah says.Within couples, she notices that “an awful lot of people, women mostly” are squaring the circle by going part-time, or even giving up work completely. “I see a lot of female higher earners go down to four days a week, yet in many cases they still end up doing five days work,” she says.For couples where a higher-earning partner has gone through the threshold, the size of pay rise needed to fund the additional childcare costs often exceeds the lower earner’s salary: “I encourage couples to think about childcare as a household expense, but women often feel if their salary won’t cover the childcare costs, there is no point.”Financial planning even extends to family planning. Ponniah has noticed more professional couples are delaying trying for a second baby until their first child starts primary school. “Either they manage the childcare costs by having a bigger gap, or by just having one child. Tragically, some couples realise they’ve left it too late.”Ahead of a challenging Spring Statement next week, tax reforms that would benefit higher earners are politically impossible for the chancellor to consider. “The overwhelming majority of parents earn less than £100,000, and too often it’s the most disadvantaged families who miss out on the support they need,” a government spokesperson said. “Giving every child the best start in life is central to our mission to break the unfair link between background and success — this starts with increasing access to quality early education.”Yet the biggest problem for many high earning parents is ignorance — they simply don’t know about the tax consequences of earning a six-figure salary, so they cannot plan for it. Perhaps understandably, official government web pages do not illustrate the problems and solutions in a way that would help higher earners navigate the tax system to their advantage. But the growing impact in the workplace means that more employers are taking pre-emptive steps to educate their staff. “Employers are definitely starting to understand what a big problem this is, especially as more younger employees enter the six-figure earnings bracket,” says Caroline Harwood, partner and national head of employment tax at BDO. She is noticing more employers proactively helping staff to manage the financial fallout, from running tax workshops to raising awareness of salary sacrifice schemes. One senior HR leader said it would be easy for companies to crunch their payroll data and issue written alerts to staff when their earnings pass a certain point, say £90,000. She added that many firms already have similar “trigger warnings” in place for staff earning close to £200,000 who risk hitting the annual allowance taper on their pension contributions. However, firms are extremely wary of being seen to give staff tax advice. Harwood says some are making financial advice from third-party firms available as a staff benefit. BDO has also received a record number of inquiries this year from employers who want to explore providing a workplace nursery. Workers moving jobs are better able to argue for a pay rise. London-based lawyer Tom* has two young children, and was offered a new role on a salary of £110,000. He successfully negotiated this up to £130,000 after showing his new employer how it would impact his family financially. He was not the only FT reader to succeed with such a tactic, however, this will only work in a limited number of professions. Far greater numbers of readers reported being hit with large tax bills after unwittingly entering the ‘trap’ or getting their calculations wrong. Teresa*, an FT reader, has had to pause her fertility treatment after a promotion at work last year took her over the £100,000 threshold: “I had no idea that my new salary was going to result in such a huge tax bill. This has had a hugely negative impact on our ability to start our family.”The timing of bonuses, which are typically paid at the end of the tax year, makes it harder to navigate the threshold. More firms are offering staff the option to “pension their bonus” in advance, but combined pension contributions from employees and employers cannot exceed the annual allowance of £60,000 without triggering a tax charge. The cost of scrapping the £100,000 cliff edge and making childcare support universal would likely cost in the low hundreds of millions, the IFS estimates. As for the tapering away of the personal allowance, even if there was political desire to simplify the system for higher earners, this must be weighed against the huge amount of tax revenue being raised. The IFS estimates that abolishing the 60 per cent rate would cost about £7bn in lost tax revenues per year, rising over time as the effects of ‘fiscal drag’ increase. However, the true cost would be lower if more higher earners responded by increasing their taxable income — through working more hours, or saving less into pensions. A future chancellor could fund getting rid of the taper by adjusting higher rate tax thresholds to compensate. However, for this to be revenue neutral, the IFS estimates the 45 per cent tax threshold would need to be lowered from £125,140 to somewhere between £60,000 and £70,000. “The government might conclude that’s not a vote winner, and they’re better off complicating the financial lives of a smaller number of very high earners,” says Stuart Adam, senior economist at the IFS. Neidle believes a more plausible solution would be increasing the top rate of income tax above 45 per cent, though higher earners would complain bitterly about it. “The political cowardice of successive governments got us into this mess, with ‘tricks’ to hide the true rate of tax,” he adds. “What was initially a small anomaly has been magnified by fiscal creep into a serious problem. Political bravery is required to tackle it. It remains to be seen if the current government are brave enough.”*All FT reader names have been changed The tax trap and the NHSThe £100,000 childcare cliff edge is a particular problem for doctors given the unsociable, long working hours they frequently undertake and the complexity of the NHS defined benefit pension scheme. FT Money has been contacted by NHS staff who say they feel the only fail-safe way of retaining their childcare benefits and keeping their pay below the £100,000 threshold is by turning down shifts, due to the difficulty of calculating their annual pensions allowance. “I am a hospital consultant, and feel trapped by this,” says Martha*. “I have tried to put as much as possible into my NHS pension, but I am really worried about what my tax bill is going to be next year. I can’t take on any extra work for the NHS because it would penalise me too much.”Nikita and her husband both work for the NHS and have one child. As he earned over £100,000, he set up a self-invested personal pension (Sipp) believing he had scope to make additional pension contributions to take him below the threshold. However, he received a tax bill in January for over £8,000. NHS staff cutting their hours at a time when the government is urgently trying to reduce waiting lists is a powerful political argument for tax reform. Tax experts note Labour’s U-turn last summer on reinstating the pensions lifetime allowance (LTA), which was driven by the impact of doctors saying they would be forced to take early retirement. In a recent British Medical Association survey, multiple doctors said they had reduced their hours to stay below the childcare eligibility threshold and ensure that they were not worse off, including those working in cancer care and psychiatry which are key areas of focus for the government. The BMA is calling for the £100,000 childcare threshold to be removed, arguing in its February spending review submission: “Fixing this is an increasing necessity therefore, in the context of increasing staff shortages, and an increasingly female workforce.”All illustrations by Miss Peach. More

Followers of markets may have noticed it is tin hat time. Many are reading the headlines and banking their substantial profits from the past few years. Who can blame them?The early weeks of the Trump presidency gave already expensive US tech stocks a last hurrah — seen as a trade on Making America Great Again. But then came the DeepSeek torpedo. Since late January, Nvidia shares have fallen 21 per cent, Tesla’s 44 per cent. The S&P 500 is down nearly 9 per cent on the FTSE 100.It is credible that Trump anticipated his tariffs would cause markets to wobble — some like to think his bruising trade deals are part of a cunning and sophisticated Maga plan to defend US domestic companies and jobs from imports. And some try to argue that consumer and business confidence will recover once he has got his tax cuts through.The alternative view is that Team Trump does not know what it is doing and failed to anticipate the effect of its policies. Occam’s razor says the simplest solution is usually right. There may be no plan!Markets are complex. Commentators offer different arguments for what drives — or crashes — them. For me, these are the key reasons why investors have been reaching for their hard hats.The first is the carry trade. This is the elephant in the room — the Big Trade. Many financial operators borrow where money is cheap (Japan) and use it elsewhere to buy promising investments. Japanese inflation has been rising, leading the yield on Japanese government bonds higher. The 10-year yield was 0.9 per cent last November. Today it is more than 1.5 per cent. The yen has risen in turn. A dollar bought ¥157 at the start of the year. Now? About ¥148.The cost for some of buying dollars by borrowing in yen has soared. Meanwhile, what of those promising assets? Borrowing a lot in yen to buy Tesla shares no longer looks so smart. Traders are reducing position sizes.Next are those DeepSeek reverberations. The news that China has developed a cheap, workable artificial intelligence app continues to hit a market already primed to sell expensive technology shares.Chief executives of US tech giants, who committed to massive capital expenditure on AI, dismissed the risks, citing the Jevons paradox — even if the service becomes cheaper, demand will increase to compensate.But is the benefit of AI so great that demand will rise substantially? And will people pay enough for that added functionality to justify the hundreds of billions being spent? The market, evidently, doubts this.Next up: Main Street USA. It seems some US citizens are surprised that the president has done what he said he promised — specifically, firing lots of public employees. Cutting central government sounds great, until it includes sacking friends and slashing public services.Alongside this, the deportation of immigrants — now under way — may again include people who many see as hard-working, taxpaying neighbours.It is all very unsettling. A trip to the mall does not help. Soaring US egg prices may be due to avian flu, but they are fuelling wider inflation concerns. Apprehensive consumers tend to rein in spending.Finally, tariffs. These dominate the headlines, but I think their impact can be exaggerated. Markets are struggling to predict where these will settle, but the sectors most affected — steel, cars and agriculture — are a relatively small part of global equity markets.The first reaction of many UK investors has been to retreat to cash savings accounts, which can offer a return that marginally beats inflation.But if I am underestimating the impact of tariffs — if they remain, if European governments have to increase borrowing, and if anti-immigration policies raise labour costs — then that cash advantage over inflation could quickly reverse.  Bonds are an alternative but these fall when inflation rises unexpectedly. And high-yielding, low-growth shares — “bond proxies” — are no safer. When inflation returns, interest rates rise, and assets relied on for yield fall in value to maintain the competitiveness of the yield. So, if an asset that yielded 5 per cent suddenly has to deliver 6 per cent, expect its capital value to fall 15 per cent. Companies with pricing power cope best with inflation over time. Even these stocks may fall when inflation first appears, as equity markets tend to follow bond markets lower initially. Over time, though, stronger companies can raise prices to accommodate higher costs. “Over time” is the important phrase here — as always with equities, only invest if planning to be in the market for several years.And so we see the return of the so-called “cockroach” stocks: those best equipped to survive highly adverse conditions — the name comes from the theory that cockroaches can survive nuclear war. I am not sure this has been tested and would rather it was not.Cockroach companies held in our funds include Japanese banks (they like rising JGB yields to some extent); UK property Reits with relatively low debt (I have recommended these for some time, and so far it has been an awful suggestion, but their rents are tied to inflation); Singapore Telecom (Asian mobile broadband is essential for small companies in a region with poor fixed telecom networks); and Munich Re (the world’s reinsurance companies take the risks governments choose not to cover, such as insuring businesses against natural disasters — demand for this cover is increasing, as are the premiums charged).These companies all have barriers to entry. This list is quite esoteric and does not fit easily into any one investment “style”, such as “value” or “growth”. But I am a pragmatist. One thing matters most to me today: “resilience”.Simon Edelsten is a fund manager at Goshawk Asset Management  More

Sir Keir Starmer should not cave in to Donald Trump’s “bullying” by lowering the UK’s Digital Services Tax, the leader of the Liberal Democrats has warned, arguing the US president is “an unreliable ally”.Sir Ed Davey said the prime minister was making a mistake with his friendly approach to Trump in the hope of sparing Britain from punitive trade measures, arguing “Trump will put tariffs on us regardless”. “He’s not sentimental . . . he can change his mind at a moment’s notice,” Davey said in an interview with the Financial Times. “He’s an unreliable ally.”The Lib Dem leader said any move to soften the UK’s digital services tax on companies such as Alphabet and Facebook would be “wrong”. The FT reported this week the UK and US were discussing the levy as part of trade talks.“To cut it would be giving in to Trump bullying,” he said. Davey instead called for Labour to increase the digital services tax to pay for Starmer’s pledge to increase defence spending.The Lib Dems have carved out a niche as the UK party that is openly and aggressively criticising the new US administration and banging the drum for old school globalisation. “If you’re interested in the economy of the UK and the security of the UK, we’re the only party addressing those real issues,” Davey said.Davey, who leads the UK’s third-largest party in Westminster with 72 MPs, said Britain should pursue a new strategic grouping with Australia, New Zealand and Canada — dubbed “CANZUK”.The grouping would focus on enhanced intelligence sharing, increased trade and greater co-operation around foreign and defence policy, Davey said.He conceded that such an allegiance “might annoy [Trump] but . . . he respects people who have got some strength”.Speaking ahead of the Lib Dems’ spring conference in Harrogate this weekend, Davey criticised chancellor Rachel Reeves’ “disappointing” fiscal decisions and touted his ambition to beat Reform UK in May’s local elections.The Lib Dem leader has long called for a rapprochement with Europe, including calling on the UK to rejoin the customs union by the end of the decade, arguing that the economic bounty from any such deal with the region would “more than make up” for the hit from future tariffs imposed by Trump.He added that it was a “huge missed opportunity” that the UK, along with the US and Turkey, would be excluded from a new €150bn EU defence fund unless it signed a defence and security pact with Brussels. Though the UK has lobbied hard to be included in the fund, talks have been held up by demands for a larger EU-UK agreement that would also include controversial issues such as fishing rights and migration.“If we’re getting cut out because we haven’t been fast enough to develop the defence and security pact, that is just such a mistake,” Davey said.Davey also argued Starmer should be much more aggressive at using Trump’s proposed state visit to the UK as leverage to win concessions on Washington’s treatment of Ukraine and Canada.“I’m not one of those who wants to sort of randomly protest,” he said. “What I do want to do is make sure we stand up for our values, stand up for our allies and stand up for our national interest.”He said it was a mis-step for Starmer not to threaten retaliatory tariffs on the US after Trump imposed 25 per cent tariffs on British steel and aluminium imports, and reiterated his call for a specific tariff on Elon Musk’s electric-car company Tesla. Musk called Davey a “snivelling cretin” earlier this year.Starmer has made successive mistakes internationally and at home, Davey said, including cutting winter fuel payments, slashing the budget for overseas aid and the “rushed” decision to cut welfare payments announced this week. “Labour have . . . been so disappointing in government, they’re really struggling.”“If Starmer chooses to ape [Reform UK leader Nigel] Farage, he will lose the next election,” Davey warned. “Farage is a divider of people and we need a politic that builds consensus, to bring people together.”Davey said he believed the Lib Dems could win the new mayoralty of Hull and East Yorkshire at local elections in May, along with scores of seats in new strongholds such as Devon, Oxfordshire, Cambridgeshire and Wiltshire. But the party will have stiff competition in Hull from Reform, which has been eyeing up the seat for months and is the bookies’ favourite to win.“If you’re in front of people, knocking on doors, the support for Farage just dissipates,” Davey said.He argued that any future electoral pact between the Tories and Reform would be a boon for the Lib Dems. “You’d see a lot of people who previously voted Conservative — even at the last election — coming to us,” he said, referring to moderate Tory voters who would be unwilling to countenance voting for a party with Farage in a leadership role. “If the right think they can act like generals moving voters here and there, they’re going to get a nasty surprise.” Whatever happens, Davey said he would be leading the Lib Dems into the next general election, expected in 2029. “I’m not standing down, that’s for sure — this is a very exciting moment for the Liberal Democrats,” he said. “I wouldn’t want to be anywhere else.” More

The companies that operate large container ships say they plan to keep going around Africa as violence flares in the region.When President Trump ordered military strikes last weekend against the Houthi militia in Yemen, he said the militia’s attacks on commercial shipping in the Red Sea had harmed global trade.“These relentless assaults have cost the U.S. and World Economy many BILLIONS of Dollars while, at the same time, putting innocent lives at risk,” he said on Truth Social.But getting shipping companies to return to the Red Sea and the Suez Canal could take many months and is likely to require more than airstrikes against the Houthis. For over a year, ocean carriers have overwhelmingly avoided the Red Sea, sending ships around Africa’s southern tip to get from Asia to Europe, a voyage that is some 3,500 nautical miles and 10 days longer.The shipping industry has largely adapted to the disruption, and has even profited from the surge in shipping rates after the Houthis began attacking commercial ships in late 2023 in support of Hamas in its war with Israel.Shipping executives say they do not plan to return to the Red Sea until there is a broad Middle East peace accord that includes the Houthis or a decisive defeat of the militia, which is backed by Iran.“It’s either a full degradation of their capabilities or there is some type of deal,” Vincent Clerc, the chief executive of Maersk, a shipping line based in Copenhagen, said in February.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

The strength of UK wages is a puzzle for economists — and a growing problem for Bank of England policymakers.Surging inflation, widespread labour shortages and a wave of public sector strikes drove growth in average nominal UK earnings to a record high of 8.3 per cent in the summer of 2023. Since then, the economy has stalled, vacancies fallen and employers have put the brakes on hiring. Productivity, the long-term determinant of wages, has been falling since 2023. Yet average earnings in the three months to January were still 5.9 per cent higher than a year earlier — and have been outpacing inflation for more than a year and a half. Bigger pay packets are a boost to household finances but also a worry for the BoE, which sees current rates of wage growth as inflationary, unless underpinned by better productivity. Understanding what is going on will therefore be critical to the outlook for interest rates. Is wage growth really as strong as it looks?The BoE’s Monetary Policy Committee downplayed the latest official wage data as it announced its decision to leave interest rates unchanged at 4.5 per cent on Thursday. A 6.1 per cent increase in private sector average weekly earnings had been fuelled by some sectors where pay growth was often volatile, it said. Other indicators were in line with the BoE’s estimate, published in February, of underlying wage growth slightly above 5 per cent. But this still means wage growth is “at an elevated level and above what could be explained by economic fundamentals”, the MPC said. The MPC added that one of the two main risks it would focus on in the run-up to its May meeting was “the extent to which there could be more persistence in domestic wage and prices”. The other risk it flagged was of geopolitical tensions pushing the economy into a deeper downturn.Will pay growth come down?Wage growth does look set to slow over the coming year. Official data shows pay pressures moderating in the last couple of months. The BoE’s own surveys, and data collected by the research organisation Brightmine, suggest employers will give pay awards to existing staff of between 3 and 4 per cent in 2025. Some employers will squeeze pay awards by 1 to 2 percentage points to offset the impact of higher payroll taxes from April, the BoE’s agents found. But Rob Wood, chief UK economist at the consultancy Pantheon Macroeconomics, said this would still likely leave earnings growth above 4 per cent on the ONS’ measure — too high to be consistent with keeping inflation on target at 2 per cent, in the absence of higher productivity. What’s driving it?One possible factor is a series of big increases in the statutory minimum wage. This does not usually affect median earnings. But employers such as the retailer Next have warned of a “ripple effect”, raising wages for staff higher up the scale to make sure there are still incentives for progression. A change in the mix of jobs in the economy could also be part of the explanation. Data released on Thursday shows employment has fallen in the low-wage retail sector over the past year, while more people are employed in professional areas and in financial services. But Xiaowei Xu, senior research economist at the Institute for Fiscal Studies, a think-tank, said these factors could only explain “a tiny fraction” of the disconnect between pay growth and the state of the economy. A further possibility floated by BoE governor Andrew Bailey — that productivity growth might not be as dire as the official data suggests — does not convince economists. “As if,” Greg Thwaites, research director at the Resolution Foundation think-tank, wrote in a recent blog.  Why is the Bank of England worried?The big concern for the BoE is that something has changed in the structure of the UK economy, meaning that workers and employers are now adjusting to a “new normal”, where wages grow at 3.5 or 4 per cent a year, and inflation hovers closer to 3 per cent. “That would be more costly to change if it became entrenched,” Clare Lombardelli, BoE deputy governor, warned at the end of 2024. Wood argues that this is already happening and policymakers are “far too sanguine” about a marked rise in household expectations of inflation five and 10 years ahead. In the years leading up to the Covid pandemic, annual pay rises of 3 per cent became standard because people expected inflation to average 2 per cent over time, he noted. Now, “households expect the Bank of England to do absolutely nothing . . . and to allow inflation to run well above target forever”.Why aren’t households spending? An additional puzzle is why real-terms wage gains are not yet boosting consumer spending. Official statistics show that both retail sales and per capita household consumption remain below their pre-pandemic level, with people saving a historically high share of their income. New consumer confidence data, published by the research company GfK on Friday, showed no-let up in gloom.Analysts say spending should pick up once households have rebuilt buffers that were depleted during the pandemic. But people still worry about rising food, energy and housing costs, threats of cuts to jobs and public spending, and talk of trade wars and rearmament. Sandra Horsfield, economist at the investment bank Investec, said the need for higher defence spending would be “unsettling” for UK consumers, as well as the threat of US tariffs leaving people “wondering how the [UK] general economic situation will fare”.  More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldDonald Trump has invoked wartime powers as part of a sweeping effort to increase American minerals production and curb the country’s reliance on China for critical resources.The president signed an executive order on Thursday directing the use of the Defense Production Act to mobilise industry and expand domestic minerals output on national security grounds. The order also instructs the government to streamline project permitting and provide loans to boost the domestic mining industry. Speaking from the White House on Thursday, Trump said the order would “dramatically increase production of critical minerals and rare earths”.The directive, which was foreshadowed in Trump’s address to Congress this month, comes as part of a broad push by the president to wean the US off reliance on China, which dominates the supply chains for many of the critical minerals that western governments are racing to secure.Show video infoThe Trump administration has already entered talks with the Democratic Republic of Congo over access to its minerals and the president’s threats to annex Greenland are driven in part by a desire to tap its rare earths. Trump said on Thursday that a stalled deal to gain access to Ukrainian minerals would be signed “very shortly”.“It’s a big thing in this country, and as you know we’re also signing agreements in various locations to unlock rare earths and minerals and lots of other things all over the world, but in particular Ukraine,” he said. The president was speaking ahead of signing a long-promised executive order to “begin eliminating” the US education department.The US is a major importer of metals, including copper and aluminium, which have a broad range of uses, from construction to energy and technology, as well as lesser-known ones such as rare earths, which are used in the defence and automotive sectors. Thursday’s order directs federal agencies to compile a list of projects awaiting approvals “in order to expedite [their] review and advancement”, according to a White House official. It will also allow them to prioritise federal lands for mining over other uses and to provide loans for new projects through the US International Development Finance Corporation.By invoking the Defense Production Act, passed in 1950 after the outbreak of the Korean war, the president can mobilise domestic industry to supply materials deemed critical for national defence. Trump had previously suggested that the law was anti-business but invoked it on multiple occasions in his first term. After pressure from lawmakers and health officials, he used it to accelerate the production of ventilators and personal protective equipment in March 2020 during the Covid-19 pandemic but was criticised for not using its powers sooner. Former president Joe Biden also invoked the act on multiple occasions, including to address a shortage of infant formula and increase the extraction of minerals critical to the green energy transition.The announcement was welcomed by the US mining industry. Rich Nolan, president of the National Mining Association, said it recognised that expanding the industry had become a “national security imperative”.“By encouraging streamlined and transparent permitting processes, combined with financing support to counter foreign market manipulation, we can finally challenge China’s mineral extortion,” he said.China holds a dominant position in many mineral supply chains. Even where China does not dominate the mining of a metal, it is often a big player its processing — as with lithium, which is used in batteries. The US imports about 80 per cent of its aluminium needs, much of which comes from Canada, according to JPMorgan. It also imports almost half of the copper it consumes, according to ING Bank. More

Shares of Accenture tumbled about 7.3% after the consulting firm said efforts to tighten federal spending are starting to weigh on its revenues.
Accenture is among the first of the U.S. corporate giants to get hit by the Trump administration’s so-called Department of Government Efficiency.
“As you know, the new administration has a clear goal to run the federal government more efficiently,” Accenture CEO Julie Spellman Sweet said on an earnings call. “During this process, many new procurement actions have slowed, which is negatively impacting our sales and revenue.”

Accenture signage is pictured in Warsaw, Poland, on Aug. 7, 2024.
leksander Kalka | Nurphoto | Getty Images

Shares of Accenture slid Thursday after the consulting firm said efforts to tighten federal spending have begun to weigh on its revenues.
Shares tumbled 7.3% after Accenture’s chief executive officer said in a fiscal second-quarter earnings call that the company’s Federal Services business has lost contracts with the U.S. government after recent reviews.

“Federal represented approximately 8% of our global revenue and 16% of our Americas revenue in FY 2024. As you know, the new administration has a clear goal to run the federal government more efficiently. During this process, many new procurement actions have slowed, which is negatively impacting our sales and revenue,” chief executive Julie Spellman Sweet said in the Thursday call to several Wall Street analysts.
Accenture is among the first of the U.S. corporate giants to get hit by the Trump administration’s so-called Department of Government Efficiency, an effort headed by billionaire Elon Musk to downsize federal agencies and consolidate their office spaces.
Sweet said that Accenture’s Federal Services was also affected by guidance from the U.S. General Services Administration to all federal agencies to review their contracts with the top 10 highest paid consulting firms contracting with the U.S. government, and then end contracts that are not considered mission-critical to relevant agencies.
“While we continue to believe our work for federal clients is mission-critical, we anticipate ongoing uncertainty as the government’s priorities evolve and these assessments unfold,” Sweet said.
“We are seeing an elevated level of what was already a significant uncertainty in the global economic and geopolitical environment, marking a shift from our first quarter FY 2025 earnings report in December,” Sweet added. “At the same time, we believe the fundamentals of our industry remain strong.”

Investors’ concerns about risks tied to slowing U.S. government spending outweighed Accenture’s better-than-expected quarterly earnings and revenue results released before Thursday’s market open. The company reported earnings of $2.82 per share on revenue of $16.66 billion, just higher than expectations of $2.81 per share in earnings on revenue of $16.62 billion, per FactSet.
Accenture shares have plunged 22.9% over the past month, bringing the stock down nearly 14.5% year to date.
Shares of consulting firm Booz Allen Hamilton slipped 8.1% on Thursday in sympathy. More

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