Budget watch

Top of the charts

Morning all,

Happy Budget week. Well, happy for the National Insurance payers among you. Commiserations to the pensioners, the landlords and the pensioner landlords. Your time will come had already come over the last few decades.

So, two real stories from this Budget. The micro – winners and losers – story, which is getting harder to keep up with after the bonkers sequence of tax hikes/cuts/hikes/cuts of recent years. And then there’s the macro story that the Budget paints – of a country that is somehow managing to combine higher taxes, crumbling public services and debt levels that are struggling to fall.

British politics is trying to generally gloss over this bigger picture pre-polling day, not least given the tax rises and spending cuts pencilled in to follow, but we’ll try to do justice to both in this week’s Budget special – based on our overnight analysis. As ever, huge thanks to the sleep deprived Resolution team for all their great work this week on that analysis and explaining it to the country.

And just to end on some optimism. Maybe, just maybe, that was the last fiscal event before the election. Have a good weekend.


Chief Executive
Resolution Foundation

The chancellor goes route one

A pre-election Budget produced… pre-election tax cuts. Who could have seen that coming? Fresh from announcing the biggest single package of tax cuts since 1988 back in the Autumn, the Chancellor delivered a second dollop of pre-election giveaways this week. This was route one stuff – there weren’t event any rabbits-in-the-hat.

And that’s despite the hoped-for major public finance improvement failing to materialise. £14 billion a year of lower debt interest was eaten up by lower tax receipts. The economy forecast was also little changed overall, with two big, offsetting changes. On the one side the UK population is bigger and growing faster, reflecting higher net immigration (now expected to settle at 325,000 a year, up from 245,000). This is a big deal, though curiously the Chancellor didn’t dwell on it… The OBR reckon the population will be one million higher towards the end of this decade than they thought as recently as November. More people means more GDP (but not GDP/capita which is what matters for supporting our living standards). But pushing the other way is increased gloom about how many of us are going to be too sick to work. This knocks 0.5 per cent off employment, unwinding the GDP boost from a bigger population.

So, neither the economic or fiscal forecasts changed much at all. But rather than cancel the party, the Chancellor pressed ahead with big tax cuts regardless. The new package, headlined by the second 2p reduction in the basic rate of National Insurance (NI) in just four months, costs nearly £65 billion over the next five years.

Fiscally frisky

Just under a third of this has been funded by new tax rises, totalling £6.6 billion in 2028-29. These include snaffling two of the revenue raisers Labour was relying on to fund their manifesto – scrapping the non-domicile tax regime and extending the windfall tax on energy firms. This should serve us a reminder as to why opposition parties, fearing government pickpockets, usually avoid announcing policy far in advance of elections – however boring that sounds to wonks and punters alike.

Instead borrowing is taking most of the strain, funding two thirds of the tax cuts. Let’s face it – it wouldn’t be a pre-election Budget without some fiscal imprudence. The Chancellor’s headroom against his fiscal rule to have debt falling by 2028-29 has fallen to the second lowest level since the OBR was founded in 2010. To spell out quite how much fiscal caution has been thrown to the wind, Jeremy Hunt would fail to meet three out of the four fiscal rules used by his Conservative predecessors since 2010 on the basis of his current plans.

You win some…

The now 4p cut will take the basic rate of NI to its lowest level since the 1980s in April, handing workers gains of up to £1,500 next year (2024-25) with around four-fifths going to the top half of the household income distribution (personal tax cuts tend to have this regressive pattern). This will be partially offset by the latest set of tax threshold freezes this April, leaving the majority (79 per cent) of employees paying less tax as a result next year. Among taxpayers, gains will average £450. If you earn around £50,000, congrats – you’ll gain the most (£1,200). Double congrats if you’ve got kids – sensible reforms to Child Benefit mean that you won’t have to give loads of it back to HMRC when you get your next pay rise. Bad news if you earn £19,000 or less though – you’ll lose more from threshold freezes than you’ll gain from rate cuts.

But this Budget’s tax cuts come after a frenetic few years for tax policy making. We’ve seen huge tax rises as well as cuts announced – and abandoned – in quick, and chaotic, succession. TOTC has charted each in painful detail. Taking all the changes to personal taxes announced in this parliament together leaves workers on middle and slightly higher earnings (£26,000 to £60,000) the net winners by 2027-28, with lower and higher earning taxpayers worse off. 55 per cent of employees gain overall, but there is significant variation: full time employees on average gain £120 but their part time colleagues lose £240.

…you lose some

Hang on, you’ve heard that personal taxes are going up – and they are by £21 billion. But the majority of employees are seeing their tax bills fall. So, where’s the money coming from? Now it’s time to set out the losers. To start, £8 billion is being raised by the freezes to thresholds for employer NI. The politics of raising taxes on firms not people is easier, but in time this will feed through into lower pay levels for employees. And then we come to the biggest group of losers: pensioners, who are already exempt from NI but affected by freezes to Income Tax thresholds. All eight million taxpaying pensioners will see their taxes increase, by an average of £1,000 – an £8 billion collective hit.

Ringing the changes

The Chancellor’s approach to targeting tax cuts through National Insurance is perfectly justifiable, even if affordability concerns haven’t been addressed (we’ll come to that). The focus on working-age employees reflects that they already pay higher rates of tax than pensioners or landlords. Furthermore, pensioners’ income growth has outstripped that of working households for some time.

But this is also a staggering turnaround from the approach of Conservative governments since 2010, who have generally focused support on pensioners (hello the triple lock). The pivot to policies that benefit younger, and hit older, voters is quite something – even if it’s been lost in the usual Budget fog. We can see it if we look at all tax and benefit measures announced this parliament: they boost the incomes of adults aged under 45 by £590, while households headed by someone aged 66 and over will see losses of £770 on average. This is the Conservative core vote losing out, as the next chart spells out. Whether this is an intentional choice to pivot towards those the Tories are struggling to win over, or a bit of an accident, is far from clear. Economically this is the right approach to tax reform, but it’s one hell of a political gamble.

The worst election honeymoon ever?

These personal tax increases combine with chunky rises in the corporation tax take (which is being sustained at its highest level this century) and wider economic changes to ensure this will be the greatest tax-raising Parliament since the Second World War. Tax relative to GDP is rising from 33.1 per cent in 2019-20 to 36.5 per cent in 2024-25 even with the pre-election tax cut rush.

But the tax rises don’t stop on polling day. Highly unusually, £19 billion of tax rises have already been announced that will  come into effect after the election. So the tax take is set to rise further to 37.1 per cent in 2028-29 (the highest since 1948). The increase since 2019-20 amounts to £3,900 per household.

Further tax rises are not all that is coming after the election. Even with loose fiscal rules, the tax cuts announced by Jeremy Hunt are only affordable by pencilling in major spending cuts to come. Real per-capita day-to-day spending for unprotected departments (think prisons, courts, FE colleges and local government) is set to fall by 13 per cent between 2024-25 and 2028-29 – equivalent to cuts of £19 billion and three-quarters (71 per cent) of the cuts inflicted on these departments in the first austerity parliament (2010-2015). The idea that such cuts can be delivered in the face of faltering public services is a fiscal fiction. For anyone that thinks they are remotely politically feasible I have a chart for you.

Whoever wins the election won’t have long to grapple with these cuts either, there’ll need to spend their political honeymoon grappling with them ahead of a tough spending review before the year is out.

More plausible, but deeply undesirable and damaging for growth, are plans to cut Public Sector Net Investment from 2.5 per cent today to 1.7 per cent of GDP by 2028-29 (a £26 billion decline). For too long Britain has been living off its past, rather than investing in its future. On current plans, we risk repeating this mistake in the decade ahead.

Small change for Britain

Budgets are always a big day for Westminster, and this week’s tax cuts are a bigger deal than most of the weary media coverage of them suggests. No-one should expect to see 4p being cut from any of the major taxes basic rates again any time soon (let alone abolishing NI altogether – this is fake news people).

But the big picture for Britain has not changed at all. It remains a country where taxes are heading up not down, and one where incomes are stagnating. In fact, they are set to remain below their level at the last general election when voters return to the polls – the first time this has happened on record. Big tax cuts may or may not affect the outcome of that election, but the task for whoever wins is huge. Not only will they have to wrestle with implausible spending cuts, but they’ll also need to restart sustained economic growth – the only route to ending Britain’s stagnation.

I shouldn’t need to remind you how important growth is, but here’s a chart for the laggards: the period since 2010 will have seen GDP per capita grow by just 0.8 per cent per year, and average real wages by just 0.2 per cent per year (given this, the average unemployment is impressively low). On both measures, this is the slowest growth of any party’s period in office since the Second World War. Whoever ends up in Downing Street, Britain must do better than this.