Pricey peaks and cakey cutbacks

Morning all,

Let’s start with a wonkhack tip – if you’re going to be grilled at the Treasury Select Committee, I highly recommend bringing a phone a friend panel as strong as the one that accompanied me on Tuesday. We spent the first half discussing the need to simplify and reform the tax system to boost growth with MPs rightly probing on why reform can prove so hard. Right in my zone. In the second half much time was dedicated to considering whether changes to agriculture property relief in inheritance tax were a threat to UK food security….

Below, we look ahead to next week’s inflation numbers. Plus, Chart of the week models the distributional impact of ‘paying for’ the abolition of the two-child limit with a tax on unhealthy foods.

Make sure to sign up for our interesting discussion next week on the growing number of young people neither earning, nor learning. Myths will be busted, and solutions crafted…

Have a great weekend,

Ruth
Chief Executive
Resolution Foundation

Birthday beef. Ever forgotten a colleague’s birthday? Your slip-up may have economic ramifications. New research, based on a non-specified national retail chain, tested the consequences of failing to deliver a timely birthday gift when one is expected. The oversight causes a > 50 per cent increase in employee absence due to sickness, and a two-hour drop in monthly hours. These effects are substantial and immediate despite the mild nature of the mistreatment. The effect is stronger for middle-managers – maybe because they expect a better relationship with their bosses. Happily, performance bounces back if a belated gift arrives, suggesting the relationship can be repaired. Even so, the costs can mount quickly for firms. The retail chain in question faced $129,600 in annual losses from the increased sick days alone. Maybe it’s time to refresh your birthday calendar holds.

Sizing up the prize. Last week’s Nobel Prize for Economics went to Joel Mokyr, Philippe Aghion and Peter Howitt for explaining how we got rich – or “innovation-driven economic growth”. Mokyr identified how technological progress drives sustained growth, whilst Aghion and Howitt developed the theory of growth through creative destruction. Mokyr argued that modern growth was rooted not in material factors but in ideas. Specifically, the connection between propositional knowledge (understanding why things work) and prescriptive knowledge (knowing how to make them work). This feedback loop between using your head and your hands sustained self-generating progress. Aghion and Howitt, meanwhile, created a model that showed how aggregate growth stays smooth despite violent micro-level disruption. Innovations arrive randomly across sectors, generating churn at firm-level but averaging out to steady progress. For Brits, enduring nearly two decades of anaemic growth and stagnant living standards, any theoretical advances that translate into boosting productivity would be most welcome. Hopefully we can turn this propositional knowledge on growth into prescriptive knowledge fast…

The original bitcoin. Those clever folks over at the Bank Underground have done a great historical look at the original currency disruptor – paper money. First introduced in 1694, the driving factor for shifting to paper notes was feared shortages of coins during wartime. It was in 1797 – fearing French invasion – that notes were first issued with the aim of replacing coins for everyday transactions. During the First World War, the Government renewed action to convert coins into paper to boost bullion reserves and pay for US imports in gold. This worked partly because wartime patriotism made people more amenable to the change, and partly because the Government built trust by ensuring parity between coin and paper and investing in measures to prevent forgery. For those who still love a (proper solid) coin though I highly recommend the patriotic act of visiting the Royal Mint.

Getting good grades. Turns out, teachers grade girls higher in subjective assessments. These researchers analysed A-level results from the 140,000 state school students who were graded by teachers instead of exams during the pandemic. There were statistically significant gender *and* socio-economic biases. Girls were, on average, 4 per cent more likely to be just above a grade boundary than below it, while students on free school meals were 13 per cent less likely than their peers to fall above a grade boundary. Notably, biases were lower in maths and sciences, where teachers had more information on prior achievements. Subjects with higher levels of discretion in grading, like Art and English, saw greater biases. My takeaway? Standardised testing reduces grade bias. Long live exams!

Something for the weekend | Persistent price pressures

This week, the IMF’s World Economic Outlook forecast UK inflation would average 3.4 per cent in 2025, the highest in the G7. Next Wednesday the ONS publishes September’s inflation figures, and they matter for three reasons.

• First, the Bank expects CPI inflation to peak at 4.0 per cent in September – likely the high-water mark for 2025. Gilt markets have had a good end to the week but we will be watching closely with sticky inflation a key reason for the UK’s high borrowing costs.
• Second, the key component of recent inflation rises has been the reacceleration of food price inflation, hitting those on low incomes hardest. This comes as food prices are already nearly 40 per cent higher than in summer 2021.
• Third, September’s inflation figure will be used to uprate benefits come April. These rose a paltry 1.7 per cent in April 2025 (based on September 2024’s CPI). But, if the Bank is right about September’s figure being 4 per cent, then the standard allowance in Universal Credit is set to rise even more than that next April – most likely 6.4 per cent, which would be worth £26 per month. This would be the first permanent above-inflation increase to the UC standard allowance since its inception in 2013.

It’s worth remembering that the real motor of the cost of living crisis was household bills – particularly energy. Lucky you, we published some bright ideas this week about how the Government could move policy costs off household bills and onto general taxation, bringing down costs for nearly three-in-four households.

Chart of the week

There is an easy test of how ambitious the Government’s child poverty strategy is – whether it scraps the two-child limit on welfare support. If you’re committed to reducing child poverty, you can’t ignore a policy that could lift 500,000 children out of poverty overnight. There are countless ways this could be funded, but one option we’ve looked at is via a new sugar and salt levy. With rates of £4 per kg for sugar and £8 per kg for salt, applied at the industry level, such a policy could raise around £3.5 billion by 2029-30 – net of it replacing the existing soft drinks levy. But would the levy hurt the very same low income families that abolishing the two-child limit would help? Our newly created distributional chart of the two policies in action says not. Such a levy would cost families across the income distribution around £100 a year on average. All of the benefits of lifting the two-child limit go to families with below average incomes. Averaged out, these two policies would leave the poorest third of households on average £200 better off (albeit unevenly), while the richest half would experience small net losses. This is how you fund child poverty reduction in a way that also improves the nation’s health and alleviates pressure on the NHS.