The Budget and Britain Top of the Charts 17 March 2023 Torsten Bell Afternoon all, I’m generally anti banks going bust. Doubly so when the rude things do it in Budget week – there’s quite enough going on already. And trebly when it ended up being a bigger Budget that most expected. But we are where we are. For our comprehensive take on the Budget – the forecasts, the policy, the lot – read our full response. The team worked their socks off to bring you 40 pages and 30 charts of hard-hitting analysis overnight. For TOTCs I thought we’d dig into some of the big questions that sit beyond, or have been thrown up by, the Budget – in part reflecting what journalists/punters have asked me over the last 48 hours. Hopefully this is more interesting and less self-indulgent than it sounds. We’ll see. Have a great weekend. Torsten Chief Executive Resolution Foundation A tale of carrots and sticks The back-to-work bit of the Budget (leaving aside the much longer-term reform agenda on disability benefits) is a story of carrots (extra cash for childcare or lower taxes on big pensions to encourage people to work) and sticks (a significant rise in benefits conditionality, requiring 800k more people to work). Our first chart shows who’s most affected by each. The extra conditionality bit is obvious: it’s poorer households affected by the stick. The Chancellor now expects more people on Universal Credit with children and everyone in a couple (previously if one partner worked lots the other didn’t have to) to work. The carrots mainly benefit middle-and higher-income households immediately. On childcare that’s because they are more likely to work, but also because poorer households already had other routes to state support for childcare so gain less from the new 30 hours free offer (note poorer parents gain from the smaller changes to childcare support in Universal Credit). On tax cuts for people who have/will now have £1m+ pension pots, it’s pretty obvious. The richest win there. So, a stick for the bottom and carrots for the top. But there is an important caveat. The chart shows you the static impact of who gains from the 30 hours free childcare i.e. given their current work patterns. But the Chancellor hopes it will encourage loads more people to work (the OBR think 60,000 of them). If it does, those will be families who would otherwise be low income. When social and economic change combine But how likely is it we’ll see big changes to employment rates for mothers in the years ahead? Our next chart has the background. It’s certainly happened before – with very large increases over the past quarter of a century. Single mothers’ employment has been rising across that period, and coupled mothers have moved into work particularly during the 2010s. To give a sense of scale, 989,000 more mothers are in employment, and 508,000 more mothers of children under 5, compared to a world in which we still had the mothers’ employment rates of 1997. So big change – much bigger than OBR’s 60,000 – can happen. Another reading of course is that we can’t pull the same trick twice (have coupled mothers employment rates topped out at 80 per cent?). I’m optimistic, but you decide. Is this what the doctor ordered? After childcare, scrapping the lifetime limit on tax-free pension savings (currently £1m) was the big move. I’m not a big fan. It costs a lot (£835m) and you need a huge pension to benefit (no, having a £1m+ pension is not normal whatever your mates think…). Jeremy Hunt’s doing it for well-motivated reasons – the former Health Secretary really wants to slow the outflow of senior doctors from the NHS and sees the alternatives as being too complex (NHS trusts giving doctors tweaked contracts) or unfair on others (letting doctors have the special treatment we’ve given judges). Those are important considerations, but with doctors only making up 16 per cent of those with large pensions (£750,000+), or around a quarter (27 per cent) of those whose pension pots are already worth £1 million+, I just come to a different view on balance. 7 per cent work for universities and half are actually in the private sector (finance and manufacturing mainly). Here’s another way of thinking about who wins. The geography of pension pots and doctors should both be highly correlated with people aged 50+ – older people have had time to save and a propensity to get ill. Our first chart shows the South of England does have exactly its share of doctors on that basis. But it has far more than its share of big pension pots – and therefore likely winners from this tax cut. Levelling up it is not. Taxes are up. For a reason. It’s taxes going up, rather more than levelling up, that’s worrying many Tory MPs. The discussion is often framed ideologically, about whether the Chancellor is sufficiently right wing. But what I rarely see people wrestling with is why taxes are going up. Rishi Sunak isn’t doing it for fun. I think the same was true for Boris Johnson, given he was PM when these tax rises (which he’s now opposing) were announced. But who knows.Taxes are up because public spending is up – both by around 4 per cent of GDP post-pandemic – as the next chart shows. And no, before you say it, that spending isn’t all on public sector woke equalities consultants – nor is the immediate issue our ageing society which is the longer-term driver of a bigger state. We’ve seen a step change in what we have to spend on debt interest since the “it’s all free” 2010s, thanks to higher debt and higher interest rates. There’s not some cunning way around that 1.5 per cent of GDP increase in spending. A similar size increase comes on day-to-day public services. That isn’t because Rishi Sunak is a socialist, it’s because Britain had austerity in the 2010s and couldn’t politically or socially sustain such low levels of public service spending. You’ll have noticed. Those two changes alone explain 75 per cent of the rise in spending and taxes – and look more inevitable than a lefty political choice. If you want taxes down wrestle with that reality more and dream about Thatcherite nirvana a bit less. Oh and explain why you just clapped a major expansion of the welfare state – requiring higher taxes – in the form of free childcare. It’s almost as if you think the public want it. Taxes are partly rising today because they didn’t yesterday As well as understanding why taxes are rising, it’s worth pondering their historic and international context. This great chart courtesy of the OBR has that big picture. The UK’s current big rise in taxes will leave us with pretty normal levels of taxation vs other advanced economies. Why? Because what makes the UK unusual is partly that it didn’t join in two phases of tax rises similar countries lived through. First the UK was unusual in not seeing significant rises during the 70s and 80s. In part that’s because we started from a higher base (thanks to war debt/an empire) and so spending falls in those areas paid for a growing welfare state rather than tax rises. And second our austerity was so deep precisely because we didn’t do what most countries did and have tax rises take some of the post-financial crisis consolidation strain. So yes the Budget was a bigger deal than expected, and the Chancellor announced a lot of new policies. Jeremy Hunt did have real choices to make – some were good (childcare) and some less so (pensions). But the big picture of economic policy making is not painted on a blank canvas – but on 21st Century Britain as it is, not as we imagine it to be.
