Bad weather for kite flying

Afternoon all,

It’s not unusual for Budget plans and numbers to change up until the last minute. But there are three things to take from this morning’s news that last week’s rumoured Income Tax rise isn’t happening anymore.

First, none of it quite makes sense. Yes, the economic forecast may be better than originally feared, but this shouldn’t have been a surprise to anyone. Not to dear TOTC readers who no doubt are aware that we anticipated such a thing in our Budget preview ten days ago. And certainly not to the Treasury, who knew the “pre-measures forecast” – i.e. the fiscal effects of all the economic assumptions – on Halloween.

We did learn from the OBR today which ten days they picked to calculate debt interest. How much is an OBR forecasting window worth? Their window is about £1.5bn better than the one we had assumed.

Second, briefing the ups and downs of the OBR forecast comes with serious risks. It is completely understandable that the Government wants people to know about a productivity downgrade and feel the need to warm people up to huge tax rises. However, we have entered a new era of pre-Budget speculation and it is having real implications for the cost of government borrowing.

Third, standing back, there is more than one way to improve the tax system, repair the public finances, and support the cost of living. We’ll have to see if the Budget is able to meet these three objectives, while still meeting the spirit, or letter, of the Chancellor’s Income Tax pledge.

Rant over, the rest of TOTC will be – as intended – a break from this week’s Political Traitors episode. Instead, we bring you the worries of the young, Brexit gloom and lack of progress in reducing regional inequality – so that should cheer you up.

Have a great weekend,

Ruth
Chief Executive
Resolution Foundation

Where the wise fear to tread… Follow me to truly feared territory – inside the mind of a 16-year-old. Except, as this fascinating essay from Demos makes clear, we really shouldn’t be so dismissive of the TikTok generation. Don’t forget: sixteen-year-olds are about to get the vote. The findings are both reassuring and unsettling – on the one hand, Andrew Tate’s grip on the youth has slipped, but on the other, as one teenager observed: “every single girl I know, including myself, has been [sexually assaulted]”. Knife crime is also a leading concern for teenagers across the country – and one that they feel is ignored by politicians. Today’s sixteen-year-olds went into lockdown the year they were supposed to be starting secondary school, and they’ll soon be embarking on working lives where growing living standards are far from certain.

Island nation. In recent weeks the Chancellor has pointed towards Brexit as one of the reasons the public finances aren’t in better nick. Is that a fair assessment? Conveniently, the Foundation’s very own Greg Thwaites co-authored a report this week assessing the economic impact of our departure from the EU. The paper estimates Brexit had reduced GDP by 6 to 8 per cent by 2025, with business investment down 12 to 18 per cent. The damage accumulated gradually on multiple fronts. Persistent uncertainty deterred investment for nearly five years after the referendum, with senior executives diverting time to Brexit planning rather than growth-enhancing activities, as firms cut spending on R&D and IT to stockpile goods. More productive, internationally-exposed firms were hit hardest, dragging down aggregate performance. Employment and productivity *both* fell 3 to 4 per cent below their counterfactual path. Initial predictions around the impact proved roughly accurate for the first five years, forecasting around 4 per cent GDP loss. But the protracted nature of the Brexit process meant the harm continued to accumulate beyond our original expectations. Gulp.

Wage formalities. This study found minimum wage increases in Brazil between 2000 and 2009 were positive not just for formal sector workers, but also those working informally. During this period the real minimum wage nearly doubled, and just under half of private sector workers were employed informally (working without an official permit). The research finds informal workers in formal firms received 88 per cent of the wage increase that their formally employed peers enjoyed. The passthrough was lower for informal workers in informal settings (e.g. domestic workers in private households), at 59 per cent, and took several years to materialise. And there was a modest employment response – a 10 per cent increase in average formal wages was associated with a 2.8 per cent shift towards other modes of employment.

Dread ahead. People massively overcorrect their risk aversion after catastrophic events – but there might be an evolutionary reason why. This research explains that natural selection is focused on the long-term survival of gene variants, and as catastrophic events have the potential to wipe out gene carriers in one go, they’re a bigger threat than individual risks (think car crash vs plane crash). So, humans evolved biases against environmental risks *even though* they’re less risky than individual ones. The researchers say this causes “dread risks”: uncertain hazards that are perceived as highly threatening and cause excessive aversion. This could help explain why, after the 9/11 terror attacks, many people avoided flying and chose to drive instead, despite strong evidence that driving is more dangerous.

Something for the weekend | Counting the cost

Next Wednesday brings fresh inflation figures from the ONS, with economists expecting a drop to 3.6 per cent from the stubbornly high 3.8 per cent we’ve seen for the past few months.

The political salience of prices isn’t fading. In the US the high cost of living remains top of mind for voters, as shown by the election Zohran Mamdani as NY mayor, running on a ticket focused on affordability. As pointed out recently the problem for politicians looking to do that, is that once prices jump they rarely fall back down, as voters might expect (or hope) them to.

That remains a problem for incumbents, including in the UK. Recent polling put ‘the cost of living’ 15 percentage points higher up the public’s priority list than ‘the economy’ – and second only to migration. Even if inflation returns to target in 2027 (!) as the Bank of England predicts, households will need to adjust to a higher price level, particularly a higher cost of essentials like food and energy, which are a bigger deal for poorer families.

The political challenge isn’t just about next week’s inflation figure – it’s about rebuilding living standards after the biggest squeeze in generations.

Chart of the week

This week’s chart turns to grimly fascinating data from last week – the index of multiple deprivation (IMD). Check out this interactive tool to find out what’s happening in your local area. The chart plots each areas’ relative deprivation this year (y-axis) with its position back in 2015 (x-axis). Places below the line have made (relative) progress on deprivation, those above it have gone backwards. It’s striking how inner London areas like Tower Hamlets and Southwark have made the most progress. Not everywhere in the capital is doing well though – Enfield is less than nine miles from Islington but their deprivation positions are far wider apart. Looking at those areas that have fared poorly there is a large concentration of large towns in the North West like Oldham and Blackburn, suggesting that the North-South divide hasn’t been falling on this crucial metric. And while economic growth can help to reduce deprivation, this is far from guaranteed. Manchester’s GDP has grown by an impressive 40 per cent over the past decade. But its unwanted position as the most deprived major city in England (on this particular measure) hasn’t changed at all.