Is PIP reaching the right people?

Afternoon all,

It’s less than two weeks till the Budget and we’ve published our take on the key decisions – and constraints – facing Chancellor Healey. If you don’t have time for all 50 pages, we’ve got your primer in Something for the weekend, and a fresh podcast dropping next week. Budget enthusiasts should also sign up for our post-Budget event while tickets last.

This week the team also tackled a very difficult topic by rethinking Personal Independent Payment, and how the system could better meet its original aim of contributing towards the costs of disability to enable disabled people to live fuller lives. Chart of the week considers whether PIP is offering the right support to the right people.

Plus, we’ve got the lowdown on the IMF’s latest global forecasts, the impact of wealth taxes, and the connection between height and class.

Have a great weekend,

Ruth

Chief Executive
Resolution Foundation

An optimistic outlook. Rare is the IMF report that a British Chancellor might want to frame, but this week’s World Economic Outlook comes close. The Fund nudged its UK growth forecast this year up 0.5 percentage points to 1.3 per cent, the joint-largest upgrade in the G7. It also pencils in the biggest fall in borrowing of that gang, with the deficit shrinking to just 1.4 per cent of GDP by 2031. But as we pointed out in our response, the picture changes once you do a headcount. On GDP per capita, the measure that matters most for living standards, the UK is set to grow by just 0.7 per cent this year, a much measlier achievement. So, while the Government has some reason to be cheery, we’re not out of the woods yet.

Northern (f)lights? Speaking of which, John Healey has apparently rejected calls to equalise Capital Gains with Income Tax. Meanwhile, a new paper found that Norway’s wealth tax reform had some success. Between 2021-2024 the reforms doubled the top marginal tax rate on business wealth, increased dividend taxes by 6 percentage points, and closed loopholes in their exit-tax (the UK is internationally unusual in being silly enough not to have an exit tax at all). Despite headlines claiming the wealthy were fleeing to Switzerland, at most 100 people left, largely before that exit loop-hole was closed, and there was also no reduced inflow of startup founders or inventors. Their departure barely dented the revenue gain, as wealth tax receipts rose 71.5 per cent (down from 75 per cent growth if they’d stayed) with no hit to economic activity and investment. Something to come back to, perhaps, Chancellor?

Short changed. We all know someone who tries to add an extra few cm to their height – but have you ever considered that maybe they’re trying to manifest better living standards? Economic historians have long used height as a proxy for standards of living, and this Substack decided to see if this applied today (with our improved healthcare and living standards) using European survey data. The author finds a predicted height difference of 2 to 5 cm between the top and bottom of the social class and income distributions, particularly dependent on whether financial hardship was experienced in childhood. So, money can’t buy everything, but maybe it can still give a few extra cm.

Fairer firms. How do firms cope when the wage floor rises? A new piece takes us inside French firms to find out, exploiting a quirk of the 35-hour week reforms that raised the average cost of a minimum wage employee by 3.7 per cent. The main response was less about firing and more about reorganising: firms trained up their lowest paid staff, stripped out layers of management and held down pay further up the ladder. With that rejig, employment fell by only 0.9 per cent, while revenue per job rose by 1.1 per cent. The main lesson, though, is that businesses respond to wage floors not just by changing pay, but by reshaping their own internal hierarchies. If you want even more labour market fun, join us and Arin Dube next Thursday (22 October) for the UK launch of his new book, The Wage Standard.

Something for the weekend

It’s twelve sleeps till the Budget, and it looks like it won’t be the most exciting fiscal event since COVID which is, frankly, good news. But it still comes at a crucial time for public finances and living standards. So to help you contextualise the coming debates here are the key takeaways from our Budget preview.

We expect the OBR’s forecast (before new decisions) will be for borrowing to be about £10 billion a year higher than in Spring. The biggest driver is higher debt interest costs thanks to global bond market jitters. We reckon wiggle room against the fiscal rule to balance day-to-day spending with tax in 2029-30 will halve from £24 billion to £12 billion. The IFS forecast £20 billion with the difference due, I think, primarily to a higher wage forecast. Neither of us knows what the OBR will do, so this is a good reminder of how important that wage forecast will be. If we are right, I expect the Chancellor will raise some taxes in 29-30 to get him a bit closer to the £20 billion number, if not all the way.

But the other challenge is household budgets. We estimate a typical family is £2,900 worse off than they would have been if the cost of living crisis hadn’t materialised. With energy bills forecast to rise to nearly £2,000 a year in January and almost one-in-five households in the poorest half of the country already behind on priority bills, there is widespread expectation of greater support in this Budget.

How to balance these competing aims – medium term repair to the public finances and immediate cost of living support for vulnerable households – will be the central tension of this Budget. Decisions about the path of public spending, on the other hand, look set to remain unresolved.

Chart of the week

We tackled the issue of PIP reform this week, so our chart digs into one of the most contentious questions in that debate – are some people receiving PIP who, on the system’s own terms, perhaps shouldn’t be? PIP is intended to help with the extra costs of disability, so in our recent analysis we asked recipients about their limitations, and the extra costs they faced. One-in-eight (12 per cent) report neither higher limitations nor higher costs (their demographic breakdown is on the left of the chart). There is a key age dimension too: almost half (44 per cent) of this group are under 35, compared with just a quarter (26 per cent) of the remaining caseload (right of the chart). The assessment doesn’t look to be doing a good job of identifying the right cohort, with 31 per cent of those without higher limitations or costs receiving a higher PIP award. On the other hand, quick fixes are not available: our research found that the scope to save money simply by excluding certain conditions is very limited. If we want a system that delivers better outcomes for disabled people, as well as being better targeted, it should also become more flexible to their needs, and more focused on their participation in society. Do read the full report for more interesting findings from our new survey of 2,500 PIP recipients, and for all the detail on our proposed changes to this vital area of the welfare state.