David Willetts is President of the Resolution Foundation and is a member of the House of Lords.
The Chancellor is stuck in an argument about why she raised taxes – and why she didn’t have to increase them even more.
She can offer three main explanations.
First, the OBR’s lower estimate of productivity growth reduced tax receipts by £14b by 2029-30, her crucial target year for balancing the current budget. The trouble with this is the OBR also increased its forecast for wage growth, boosting revenues by a similar amount – as I explained in my pre-Budget column. So there was no overall OBR black hole. And whilst the two effects balance out, they add up to an uncomfortable account of our economic performance in which we are less productive but paying ourselves more.
The second explanation is that she needed to increase the £10b fiscal headroom in 2029-30 which she allowed herself in the last budget. It is absurd that so much of the British economic policy debate over the past year has got bogged down in tiny shifts in the fiscal forecast five years out. Now she has got a much healthier allowance of over £20b. But increasing fiscal headroom lacks any political appeal as a case for raising taxes – it isn’t quite the same as raising taxes to cut hospital waiting lists.
And it exposes the Chancellor to the charge that she made a serious mistake last year cutting her headroom so much.
The third explanation is that she needed to raise taxes to fund increased spending on welfare.
She needed about £7b to cover the cost of her failure to get through her planned cuts to disability benefits and £3b for the ending of the two-child cap. This is where the argument is most obviously party political as it is about the size and shape of the state. Many Conservatives see £10b of extra welfare spending as a charter for shirkers and scroungers. It is also seen as evidence the welfare budget is out of control. So let’s look at the figures.
Welfare is a vaguely derogatory term and in the US is very clearly distinguished from Social Security which is a much more favourable description. In the UK all benefits are now called welfare to generate a very big figure indeed – £324b this year, the largest spending programme. This compares with £280b of benefit spending (in today’s money) before Covid hit. That gap is the £44b which Mel Stride announced in his Party Conference speech as the amount he could save by taking welfare spend back to the level it was at in 2019 pre-Covid.
The changing pattern of spending on welfare is best tracked as a proportion of national income.
It was down below 10 per cent of GDP before the financial crash of 2008. It then grew dramatically to reach a peak of 12 per cent of GDP under the Coalition in 2012. Then tough Tory measures brought it back down to a new low of 10 per cent of GDP in 2019, Mel Stride’s base year. Since then it has risen to 10.8 per cent of GDP and after the Budget benefit spending may be running at about 11 per cent for several years. So the Chancellor is settling for a figure halfway between the Coalition high and the pre-Covid low.
The tough measures between 2016 and 2020 fell almost entirely on working age families. Child benefit and Universal Credit were frozen in cash terms and the two child cap came in for babies born after 2017. Those cuts have broadly stayed in place. The benefit income of families has fallen by an average of £1,500 since 2010.
The £44b increase in spending since Covid is not spending on families. It comprises £21b extra spend on pensioners through the triple lock and £24b of extra spend on disability benefits. Benefits for working age families – many of whom are in work but low-paid – have been cut by £1b.
The benefit budget is £324b this year. That comprises £178b of spend on pensioners, £64b for non-pensioner incapacity and disability benefits and £82b of spend on families (non-pensioner, non-health related spend) The budgets which are surging are for pensioners because of the triple lock and disability benefits. Both need to be tightened up. The budget which has been cut most severely and which has the worst impact on the nation’s future is for working aged people and children not receiving health-related support.
The working age benefits are predominantly for people in work.
Freezing their benefits in cash terms whilst pensioners get a surge above prices or earnings cannot be defended, even by pensioners who care about future generations. The time has come to redress the balance and do a bit more for working age families. That part of the budget was right. At the same time it could have been matched by a statement that the triple lock would not carry on after the next election. And there could have been a fresh commitment to reform disability benefits.
In its last year the Conservative Government proposed a higher threshold for claims which would have saved money though the main losers would probably have been middle aged people with arthritis. There is a case also for more frequent assessment of claims as some disability conditions do vary. Proposing such measures would have been strong evidence of fiscal discipline whilst also helping families with children . At the same time the chancellor did need to provide greater fiscal headroom.
All that adds up to a package which could have given extra confidence to the bond market and so brought interest rates down reducing the cost of Government borrowing. Reductions in Government borrowing help future generations the most. Overall it would be a package for helping future generations. The Chancellor got quite close to such an account of what she was doing and why.
But once again she ended up missing her opportunity to outline a coherent and credible political narrative.
