Happy first birthday Government special 4 July 2025 Afternoon all, What a week. There will now be a review of whether the current assessment system is fit for purpose BEFORE reforming disability benefits. Some sense in that, but the way we got here risks meaning the Government has lost the trust needed to do that reform. Despite the bluster the Bill remains significant, curbing the incentive to claim incapacity benefits for new claimants and delivering a much-needed real terms boost to claimants of standard Universal Credit. While it no longer saves in 2029-30, it will deliver meaningful savings beyond then. Of course the Autumn now looks even more challenging than it did. The bigger pain may come from the economic risks we already knew were out there, but £6 billion of U-turns certainly won’t help. Ultimately markets this week have voted for the Chancellor – their confidence that Rachel Reeves means what she says about sticking to fiscal rules seems to be material to gilt yields, and so is saving the taxpayer on debt interest. That leaves tax and spend to share the pain. And with the Spending Review done, tax now looks hard to avoid. Given the potential scale of this challenge, one of the lessons learned from the welfare debacle is surely that there is merit in some early pitch-laying for the Budget that increases the room for manoeuvre, rather than allow fevered speculation to build unguided over the next few months. From one traumatic event to another, there’s a first birthday to celebrate. What the world needs is another look back, so I’m bringing you five charts to mark the highs and lows for the Government so far… Ruth Chief Executive Resolution Foundation Bad economic inheritance (or get your excuses in early) If there’s one number the Government wants you to remember from the last year it’s £22 billion. While it doesn’t play into political drama so well, there should be more discussion about the ‘other’ economic inheritance. Fundamentally, the British economy has (yet) to emerge thriving from the pandemic and cost of living crisis. The chart below shows just how weak productivity has been since the pandemic (especially when you take into account that the ONS managed to ‘lose’ around a million people in employment). Let’s all try to spend a little less time this summer judging OBR vibes and a bit more worrying about how to change this picture. But it’s not all bad news There has been some good news (honest, guv), and it has come in a key area. No, we’re not talking about Rod Stewart’s Glastonbury set, we’re talking about living standards. The Government has rightly prioritised raising them, setting itself the target of increasing Real Household Disposable Income per person over the course of the Parliament. And that has got off to a good start with a punchy outturn for 2024-25 of 4.2 per cent – the highest in five years. The chart below shows what has happened to living standards so far in the 2020s, and what’s forecast. There are three clear periods: chaos at the start of the decade with the pandemic, followed by the height of the on-going cost of living crisis, followed by a bumper 2024-25 and then relative stagnation. It seems unlikely the government wants to go into the next election saying last year was the best we had, so here’s to outdoing these forecasts… It’s not all about the growth… Some things are worth doing even if they aren’t so easily measured. There have been big debates about the economic impact of the Government’s shakeup of employment rights. The truth, as we reported on this week, is that they are likely small (neither causing a productivity boom, or a huge economic hit). That doesn’t mean it isn’t a big deal though. For those workers who can newly take a sick day and not lose pay, or have some notice of their shifts the next week, the impact on wellbeing could be huge. Britain has virtually eliminated (hourly) low pay, thanks to a ramping up of the minimum wage. So now’s the time to take on the next challenge for lower-paid workers – hours and job insecurity. As the chart below shows, 2.4 million workers report being very anxious about changes to their work shifts. Yes, the Bill has some complexity and imperfections that need to be ironed out. But the big picture here is that we’re taking the UK from being at the Wild West end of labour market regulation to comfortably lower middle table among OECD countries. The biggest tax raising Budget…ever Back in October Rachel Reeves unveiled a bold Budget which taxed more, borrowed more and spent (A LOT – more than £400 billion more than the last lot planned) more. This chart below shows you that Governments often raise taxes after elections, but this time surpassed expectations. The massive increase in employer National Insurance has meant the Government has been able to shift the dial on spending on public services, relative to the tight path pencilled in by the previous Chancellor Jeremy Hunt. This increase is to be welcomed – it will boost the services used by lower-income families – but the problem for the Government is it starts from a position where satisfaction with public services is at a low. Raising taxes to avoid further cuts to public services that were probably never going to happen anyway is not the kind of slogan you’d put on the side of a bus… The welfare roller-coaster leaves tough choices spread pretty evenly Now for those who’ve been desperately wondering this week…where do these U-turns leave the distribution of policy on household incomes? Don’t worry, we’re always here for you. And actually, the picture has changed. The Government can now claim to be spreading the difficult decisions pretty evenly across families. On average households in the bottom half of the income distribution see a reduction in income of 0.5 per cent due to policy changes – exactly the same as those in the top half. Of course, if we took into account the benefit-in-kind from additional public services funding the picture would be progressive. (For those focused on the wealth tax debate, we should be clear these charts don’t include Capital Gains Tax or Inheritance Tax changes made in the autumn, as they are taxes on wealth transfers rather than regular incomes, and because of difficulties in modelling). A tumultuous first twelve months It’s fair to say that it’s been a tumultuous first year for the Government. In his first conference speech as Prime Minister, Keir Starmer warned of the need to take ‘unpopular decisions’. Well he’s certainly delivered on that… But no-one was expecting a repeat of 1997 – the economic winds at home and abroad are completely different, and far more troubling. Tax rises last Autumn were inevitable – though pretending they weren’t in the election campaign – has unnecessarily tied the Chancellor’s hands in delivering tax changes as effectively as possible. Rising to the challenge of taking tough choices on tax is going to be just as important this autumn. The Government has made a dog’s dinner of the welfare bill, but progress with the equally important employment rights and planning reform bills has been smoother. How all this legislation is implemented and delivered over the rest of the Parliament could make a big difference to living standards – from getting more people into work and new homes, to improving conditions for those already with jobs. The current living standards outlook for the rest of the decade isn’t pretty – but there’s plenty of scope for changing it.
