The Chancellor announced an impressively broad suite of policies to encourage more people into work, but Britain’s economy remains stuck in a deep funk – with people supported into work but getting poorer, and paying more tax but seeing public services cut, the Resolution Foundation said today (Thursday) in its overnight analysis.
The Foundation’s Budget analysis report – We’re going on a growth Hunt – examines the economic backdrop to Budget 2023, and assesses whether the Chancellor has successfully delivered on his central objective of boosting growth through higher employment and business investment.
Highlights of the overnight analysis include:
- Defying the odds on a downturn…. The UK is forecast to have gone through the biggest energy and inflation shock since the 1970s, while avoiding a recession, and with unemployment peaking at just 4.4 per cent. In contrast, the mid-1970s energy shock was accompanied by a recession with a 3.9 per cent peak-to-trough fall in GDP.
- …but a disastrous decade for living standards. Typical real household disposable incomes are on track to remain lower by the end of the forecast (2027-28) than they were before the pandemic (2019-20). If even the slow growth of the past decade had continued, incomes would still be £1,800 higher than currently projected for 2027-28.
- Taxing times for all. Taxes as a share of GDP are on track to hit a 70-year high of 37.7 per cent by 2027-28 – a 4.7 percentage point increase since 2019-20, equivalent to nearly an extra £4,200 for every household in the UK. Despite this, the Chancellor only has a quarter of the average fiscal headroom of the last three Chancellors, and wouldn’t meet the fiscal targets set by Chancellors Sunak, Hammond or Osborne.
- Much needed help for parents… The Chancellor announced the biggest increase in childcare support on record. As well as encouraging more parents to work it will make it worthwhile for many to work longer. Under the current childcare system, a single parent of a one-year-old earning the National Living Wage would see their income fall after childcare costs by £370 if they moved from 25 to 35 hours of work a week. However, under the new system, the same single parent would receive an income boost of £700. Overall, the richest fifth of households are set to gain £180 on average from the extra childcare entitlement, compared to £130 for the middle fifth of households, and £20 for the bottom fifth.
- …but an unneeded tax break for wealthy pension savers. Raising the annual, and scrapping the lifetime, allowances for tax-free pension saving cost around £1.2 billion and are expected to increase employment by 15,000 – a cost of around £80,000 per extra worker. And even those employment gains may be overstated, given that giving very large wealth boosts will actually encourage some people to retire earlier than they otherwise would have done (someone with a £2 million pension pot has just received a tax cut of almost £250,000).
- Austerity returns… The Chancellor chose largely to ignore pressures on public services in this Budget, but unprotected departments face 10 per cent cuts to real day-to-day spending per capita by 2027-28 – rising to 14 per cent if the newly announced aspiration for Defence spending to rise to 2.5 per cent of GDP is met over the next parliament.
- …and the investment roller-coaster continues. The £28 billion three-year increase in investment allowances represents the fifth major corporate tax change in just two years – illustrating the lack of certainty that has frustrated businesses. The policy will deliver a temporary 3 per cent boost to investment, when what Britain actually needs is a permanent 30 per cent boost to catch up with our competitors (France, Germany and the US).
Torsten Bell, Chief Executive of the Resolution Foundation, said:
“Jeremy Hunt’s first Budget was a much bigger affair than many expected, combining improvements to the dire economic and fiscal outlook with a significant policy package aimed at boosting longer-term growth in general, and the size of the workforce in particular. A step change in childcare support stands out.
“But stepping back the UK’s underlying challenges remain largely unchanged. We are investing too little and growing too slowly. Our citizens’ living standards are stagnant. We ask them to pay higher taxes, while cutting public services. No one Budget could turn that around, but it’s time Britain did.”