Rewriting economic history

Afternoon all,

Generational warfare continues. This week, I wrote a Substack for Politics UK on how we could tip the balance a bit more in favour of the young. And then in the latest episode of our High Resolution podcast (subscribe!) we debated whether the triple lock’s time had come. Our two brilliant guests brought very different perspectives, but we could agree on the need to consider those pensioners still living in poverty and the slightly wild unfairness (including between different pensioners) that could arise when the Government tries to avoid charging income tax on those whose only income is the new state pension.

On Sunday, I’m off to Liverpool. We’ll be bringing some great discussions – featuring AI Minister Kanishka Narayan MP, Employment Minister Andrew Weston, Alan Milburn, Shadow Chancellor Andrew Griffith MP, Yuan Yang MP and more – to both Labour and Conservative conference. All the info you need is here.

Read on for some controversial takes on fiscal devolution and property taxation, and a chart that rewrites economic history.

Have a great weekend,

Ruth

Chief Executive
Resolution Foundation

Parched parks. It’s been a relief to see grass returning to London’s parks – but did the unignorable heat of the summer change public attitudes towards climate change? This blog uses newly commissioned polling to show that the salience shot up – for some. Climate policy enjoyed cross-partisan prominence five years ago but fell off a cliff at the start of the war in Ukraine; until this summer when it surged back as a top five issue. Concern doubled in France, Spain and the UK (countries hit hard by extreme weather). However, this refocusing was driven by progressive voters, rather than cross-partisan concern. Politics mattered more than class – a working-class Labour voter is five times more likely to prioritise the climate than a middle-class Reform voter. And with recent evidence suggesting salience has cooled down with the temperature, it’ll be interesting to see if rising energy bills shift the dial.

Are you local? Burnham favours devolution – this much we know. The devil remains in the detail as ‘fiscal devolution’ covers hundreds of different policy options for putting pounds and pence into the hands of mayors. Handily, Centre for Cities have published a briefing setting out how they think it could work. Mayors would need 7 per cent of Income Tax and 2 per cent of Corporation Tax (to catch the well-paid commuters…) to match current settlements. That adds up to roughly £21.5 billion by 2030. The trick then is how to provide a growth incentive while avoiding unmanageable outcomes for those who grow less. To stop fast-growing places pulling away, the authors propose a Swiss style system of skimming their Income Tax to top up slower growing areas, but not Corporation Tax so growth is still incentivised. This is complicated – keep an eye out for our take next month…

Money for nothing. If AI starts doing our jobs for us, what happens to our sense of purpose? A new review from Google DeepMind researchers tries to answer this by looking at people who already live without work: the unemployed, retirees and lottery winners. The evidence is… a mixed bag. Over 90 per cent of retirees report being satisfied with their lives, but those pushed into early retirement fare badly, as do the unemployed. Perhaps more surprisingly, more than 85 per cent of lottery winners carry on working after their windfall (maybe the yacht gets boring by Wednesday?). The authors argue that choice is the key ingredient. They conclude a universal basic income alone would be “highly insufficient” because people who have no choice over whether they stop working would still take a wellbeing hit. Beyond the importance of agency, that’s also down to the loss of other non-financial benefits including “status, time structure, collective purpose, and cognitive health”. So, try to remember that not working can be worse than working come Monday morning.

Pay to stay. Why do so many older, wealthier people rattle around big family homes while young families rent? A new paper points the finger at peskily low property taxes. Using data on reassessments, they model the effect of increasing California’s famously low rate (0.8 per cent) to Texan levels (2 per cent) and find that it would cut homeownership among the over-65s by 6.2 percentage points while nudging it up among under-45s. The logic is that every percentage point of a recurring tax works to knock 23 per cent off house prices, meaning young buyers pay less up front while empty nesters face a bigger annual bill to stay put. Britain has its own version of the problem, with Council Tax still based on 1991 values and Stamp Duty punishing movers – our new report argues that we should scrap both and replace them with a single tax on up-to-date property values. Housing wealth has had a very good few decades, and it might be time it started paying its way.

Luck of the draw. How much do you know about, say, a typical peasant’s life in the Indus Valley 5,000 years ago? Well this great website generates a random human being before using real statistical data to ascribe them a marriage, children (if they’re lucky to live that long), life expectancy and causes of death. I got a boy in the Ganges Plain in 1784 BCE who got married at 21 but only lived to 27 and had a 29 per cent chance of dying of pneumonia. The day-to-day living standards of low and middle income households is our focus, but zooming out (a millennia or two…), we’ve been lucky in the birth lottery.

Chart of the week

The ONS has been overestimating working hours, meaning our average growth in output per hour (a crucial productivity measure) wasn’t actually lower than other countries since the financial crisis. Our chart (and latest research, hot off the presses) shows how much this changes our economic history. The top row of dots is where we thought productivity growth stood two weeks ago. Despite coming in at well above 2 per cent in the decade before the financial crisis (dark blue), it had tumbled to 0.6 per cent after the pandemic (green), worse even than the post-crisis decade (red). This cast the OBR’s medium-term assumption for future productivity growth (black dot) as rather optimistic – even after last year’s downgrade – assuming a growth rate not sustained in nearly twenty years. The second row of dots shows where we stand now. Suddenly, the post-crisis slump looks far less steep, with the OBR’s medium-term assumption now below that trend. Good news for the public finances? Well, not so fast. First, it’s unlikely the OBR received this data in time to consider it at the Budget. Second, there’s no guarantee they’ll shift their assumption – they might take it as vindication for their previous optimism, without choosing to double down on it. Third, hours worked matter for the public finances too. If UK workers are more productive but also working less there’s a risk it could all come out in the wash. Still, we now have a forecast for the public finances which isn’t wildly out of whack with recent trends – which is not a position we have been in for a long time.