It’s the day after Jeremy Hunt’s first Budget and so far the Chancellor has managed to avoid disaster. Reaction has been muted, with the Daily Mail asking the question on the mind of many Tories: ‘Is it enough to turn the tide?’ The Guardian and Mirror have, predictably, focused on criticism of Hunt’s proposal to abolish the Lifetime Allowance but thus far the Chancellor is yet to see his Budget ‘unravel’ in the manner of George Osborne’s 2012 statement or Kwasi Kwarteng’s ‘fiscal event.’
However, this morning’s Budget briefing from the Institute of Fiscal Studies offered some grim analysis. Paul Johnson and his number-crunching team ran through the figures in the Spring Budget in detail. There was some relief at the return of ‘a relatively normal’ Budget, post-pandemic and with the OBR forecasting inflation to drop from 10.7 to 2.9 per cent. There were few surprises in the Budget, with Hunt lacking much headroom against his fiscal targets, though the IFS found plenty to discuss.
Here are five key takeaways:
- Free childcare is the ‘end of a journey‘
If this Budget is to be remembered for anything then it will be for the extension of free childcare to working families with children under three. This, Johnson argued, is a major expansion of the welfare state. It moreover represents the ‘logical end point of a journey’ which used to be about giving all children a good start in life; now it’s just about getting their parents to work to boost the economy.
In 2000, very little pre-school childcare was paid for by government: just over two decades later we will soon be spending over £8 billion a year. The government plans to pay for over 80 per cent of all formal childcare for pre-schoolers in England, up from the 50 per cent it currently funds. That brings risks for the childcare market, if provision is not funded appropriately.
- A ‘lost decade for living standards’
‘Continuing pain’ will be the experience of households over the next year. Inflation will come down but prices remain higher than before, with earnings failing to catch up. According to the IFS, freezing income tax and NICS allowances and thresholds will cost most basic-rate taxpayers £500 next year and the bulk of higher-rate payers £1,000 – not good news for some of the Tory core vote. Real disposable household income is set to drop by 3.7 per cent this financial year, and over the next year by a further 2 per cent.
The OBR suggests this will be ‘the worst two years on record for household incomes’ with projections suggesting that ‘real household disposable incomes will be no higher in 2027 than they were in 2019, and barely higher than in 2017 – a lost decade for living standards.’ For context, if income growth had continued rising at the same rate as it did from 1948 to 2008 then the average household would be £10,000 richer.
- Debt could be Hunt’s big battle
Even with very tight spending pencilled in from 2024, debt is ‘barely falling’ according to Johnson owing to a ‘high debt level, high debt interest payments, additions to debt that are not included in borrowing, and sluggish nominal growth’. The OBR noted that ‘it is now harder for this Chancellor to deliver a falling path for the debt-to-GDP ratio in the medium term than it has been for any of his predecessors since the OBR was established in 2010’.
Cutting the debt is, of course, one of Rishi Sunak’s much-fabled ‘five priorities’ with the IFS analysis implying that it will be the most difficult to achieve of the PM’s three economic goals. The Institute has produced figures which show the scale of the problem facing the government: in the next fiscal year it is expected to spend more on debt interest (£116 billion) than on defence (£68 billion) and crimefighting (£47 billion) combined.
- We are moving to a ‘high tax’ economy
Johnson’s colleague Carl Emmerson told attendees that Britain is now becoming a ‘high tax economy.’ He pointed out that the government ‘is bringing the tax burden up to levels that the UK hasn’t seen in recent decades, and up to a level the UK has never sustained in its history.’ This is not a point that has escaped notice, with ‘Hunt waves through biggest tax burden since the war’ being the headline on the Times front page today.
- Constant tinkering is damaging the UK
Exacerbating this problem is the UK’s ever-changing landscape for businesses, with the top rate of corporation tax set to rise to 25 per cent. Hunt tried to offset this change by introducing full expensing in a bid to make the UK a more attractive place for companies to invest. However, this is only being put in for three years on a temporary basis, making the changes much harder to defend. Isaac Delestre argued that most of the £11 billion peak annual cost of full expensing will be recouped in future year. Instead, you end up distorting the timing of investments, adding more instability and uncertainty to a tax landscape that has changed repeatedly in recent years.
The trajectory of the annual investment allowance resembles, in Delestre’s words, an ‘unholy mess of spaghetti’ with the government’s ‘extremely mercurial’ plans changing ‘almost on a yearly basis’ – hardly conducive to a tax environment that will encourage businesses to make long-term investment decisions in an efficient way.
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