The Spring Budget explained

Paul Johnson

Hello, and welcome to this special episode of the IFS Zooms in, I'm Paul Johnson, director of the Institute for Fiscal Studies, and we are here today to talk about this spring budget, what the Chancellor announced and our initial analysis. Joining us are early years expert, Christine Farquharson, tax expert Helen Miller, and Public finances expert Ben Zaranko, all colleagues of mine here at the IFS.

Quite an interesting budget we had from Jeremy Hunt, not the sort of interest, happily, that we got back in September when Kwasi Kwarteng was exciting us with some huge tax cuts, but a more nuanced set of measures looking to, in the Chancellor's own words, increase the number of people in work, improve incentives for investment, and generally do a bit for the supply side of the economy. But he was hedged in by the public finances, the OBR was nowhere near as gloomy as the back of England, but it still didn't give him a lot of room for manoeuvre in terms of tax cuts or spending increases. And I'm sure we'll come onto this, the outlook for household incomes in particular really does look pretty miserable.

But let's start with the big picture, let's start with the economy, then we'll say something about the public finances, then tax, and then some of the other issues including child care. And the big picture here, is that it looks like the economy at least won't go into recession this year, but it probably won't grow, and then we'll get reasonable growth of 2% a year or so for the next several years. But the consequences, Ben, for the public finances here were, the Chancellor had a bit of money to play with and he spent most of it.

Ben Zaranko

That's right, he spent about two thirds of it, and that's in sharp contrast to what happened in the autumn when things got worse, and rather than responding with some sort of fiscal tightening, the Chancellor chose to absorb that through higher borrowing, this time things have got better and he's gone, “great” and spent it. He's spent it mainly on things aimed at boosting the UK's rather dismal growth prospects, around things encouraging employment or encouraging investment, but there's no getting away from the fact that yes, he spent it

Paul Johnson

And his key fiscal target is to be getting debt down in the last year of the forecast period, which is in 2027/28, and he's just about meeting that target.

Ben Zaranko

He is just about meeting that target. Back in the autumn, we said he was meeting his fiscal target by a hair's breadth, something similar, he's managed to go even tighter it was about nine billion previously, now about six billion. Although it's a rather peculiar target, it's for debt to be fallen between year four and year five, we're actually now going to have debt at a lower level than we thought previously, but falling by ever so slightly less, it's a bit silly to be aiming for just that change in just that one year, makes it very sensitive to your assumption about what growth and inflation and other things look like just in that single year. But yes he is, on paper at least, on track to meet his fiscal target, partly because taxes are going up to a very historically high level, and partly because he's pencilled in some very tight spending plans for beyond the next election.

Paul Johnson

All of that really matters, and we'll talk to Helen about the consequences of this particular target for actually messing up one of his big tax policy changes, but the, I think the real picture for me on the public finances here is that, as you say Ben, he's got record high levels of tax going forward and a really quite tight public spending forecast over the next few years, and yet he's not managing to get debt coming down in any serious way. And of course, a large part of the reason for that is first, very high spending on debt interest, and second, pretty feeble economic growth, are we stuck with debt at this high level into the indefinite future?

Ben Zaranko

At least over the next few years, we certainly look like we're going to be. You know, it's worth saying that the Chancellor, in some ways was quite lucky, he was quite lucky we had a warm winter, he was quite lucky that energy prices came down, he's quite lucky that the OBR is among the most optimistic of all the independent forecasters, but in other ways he's actually picked quite a bad time to be Chancellor. The OBR say that, basically of any time since 2010, to get debt falling now requires fiscal policy to be even tighter because of the higher debt interest, because of those dismal growth forecasts, because we've got a higher level of debt to begin with. So, he's actually having to try really hard just to get debt effectively flatlining, and it would take something quite dramatic to put it on a decisively falling path over the next few years, or indeed into the medium term.

Paul Johnson

And indeed, he's only getting there by really, let's be blunt, making some stuff up. He's making up the idea that we are going to, after the next election, he's got any control over what happens to public spending, and he's saying that's going to be ever so tight, and he's making up we are going to be raising fuel duties, having not done so thirteen years, and he's probably making up the fact that we are going to make some of the tax cuts he's announced temporary rather than permanent, all of which puts the sort of idea that this is a transparent way of meeting fiscal targets somewhat, shall we say, into question.

But before we go on to that, let's just say one word about public spending and public pay, because clearly that's going to make a big difference to what happens over the next few years. On public spending, generally, did we – what, what did we learn?

Ben Zaranko

We didn't learn an enormous amount, there was a bit of extra money for defence, and there was some extra money for the high profile childcare announcements, which I'm sure we'll come back to, and there was some extra money added into the government's spending plans to pay for those. Looking into the medium term, the government's spending plan, so beyond the next election, were left broadly unchanged, growing by about 1% per year in real terms. So effectively not much was in the budget, one thing that is difficult is that there are clearly still ongoing public sector strikes, indeed, there were big strikes on the day of the budget itself. There are now rumours within the last few hours, as we record this, that there's going to be a deal proposed to end the strikes within the NHS, but above what was previously budgeted for. And what remains very difficult to see is how you can have a bigger pay award than what departments have said is affordable without providing any extra cash. It's very difficult to see how you square that circle, you can do something one off, you can provide some sort of bonus or a backdated pay award, but a proper consolidated pay award that goes right into the future, is probably going to need extra funding, and the Chancellor made no allowance for that in his budget, and it'll be interesting to see how they try to work through that over the coming months.

Paul Johnson

Okay, we'll probably come back to some of that, and actually we might come back to you, Ben, to talk about living standards a little bit, but let's move on to tax. I mean, let's start with some of the ways in which what we've just been talking about relates to tax. So actually, Helen, let's start with something that wasn't mentioned in the budget, but which has been announced a little while ago, which is the freezing of income tax allowances and thresholds, that is actually a very big tax rise both coming in this April, and Indeed over the several years that we are in the middle of at the moment. Can you just explain to the listeners how changing nothing in a sense actually turns into a big tax rise.

Helen Miller

Sure. So, there are allowances in the tax system that dictate when you start paying tax, so, the personal allowance for income tax, and when your tax rate increases. And of course, over time, as we definitely know nowadays, prices are going up and normally what you would expect is for the thresholds to go up as well. So that when your income goes up, you don't pay more tax simply because you have more in, in sort of cash terms, the thresholds are meant to move so that you are only paying more if you actually get richer. So that's not what's happening, instead the government has frozen basically all of the thresholds in the income tax, and national insurance systems, so that as prices go up, as inflation gets higher, more people get not only dragged into tax, but also dragged into higher rates of tax. So, we can give you a sense of scale of that, just this year alone, the effect of freezing the thresholds mean that there'll be 1.7 million more people who have to start paying income tax, and there'll be 1.2 million more people who are higher rate taxpayers, now, that's just one year of this policy of freezing thresholds. If you pan out and look at the effect of the entire six years, because it's a policy that's going to be in place for six years, that actually there'll be 3.2 million people who will be paying income tax that wouldn't have been paying income tax, had the thresholds been uprated with inflation, and another two and a half million people who will be paying higher rates of tax. And as you said Paul, we don't think of that as a tax rise in the sort of classic sense because rates aren't changing, but overall, over that six years, that's about a thirty billion increase in taxes for people. So, it is a very big tax increase that's going under the radar.

Paul Johnson

A thirty billion tax rise that is very substantial, and actually what's coming in this April is a big chunk of that because it's, because this is a period of high inflation, and as well as bringing people into income tax and into higher rate tax, if you're already a taxpayer, you will be paying quite a lot more than you would've done had these thresholds gone up in line with inflation. And the reason for that is a bigger fraction of your income is taxed at these rates, and we are looking at a £500 loss, just in April, for most basic rate taxpayers and a £1000 loss just this April for most higher rate taxpayers. And that comes to rather more if you look over the full six years.

Helen Miller

Yeah, so people won't have heard about a tax increase in yesterday's budget because it wasn't announced then, but people are going to be substantially poorer than they would otherwise have been because of these freezes in income tax thresholds.

Paul Johnson

There was another non-change as it were, which is a constant non-change, which is the failure to increase duties on petrol and diesel in line with inflation. And again, rather like tax allowances, if you don't respond to inflation, you're making real changes to the tax system. And the fact that these duties haven't gone up now for thirteen years, means that the level of tax on petrol and diesel is much, much lower than it was thirteen years ago. And coming back to what Ben was saying earlier, we've got this ludicrous situation, haven't we, where every year the Chancellor says, “I'll increase it next year,” and every year he never does.

Helen Miller

Yeah, and that really, it really is ridiculous. So, back in 2010 we had a system where prices rose, and every year the government put up fuel duty just to meet the, the effect of those rising prices, and that was expected to go forward. And then every year since then, they've said, yes, next year we will do that, we'll revert back to the default uprating, and every year when it actually comes to it, they've said, oh no, not this year, next year. And of course, maybe the first couple of times you could see that maybe it was a temporary measure, now after thirteen years, I don’t think anybody believes that next year, in an election year, is going to be finally the year where the promise comes true. And it wouldn't matter, I don't think, that if the government said, “we want to cut fuel duty,” that is completely the government's choice to do that, but I think what is definitely not okay is to each year pretend they're going to increase it, have that be baked into the public finance numbers, as you mentioned, have it be part of the baseline, and then actually when it comes to it saying, no, sorry, we're not going to do it. That is the part of it that I think is really, at this point, inexcusable.

Paul Johnson

Particularly this year when, last year Rishi Sunak, when he was Chancellor, announced a temporary 5p cut in the fuel duty, at a time when prices were up at what, 180 190 a litre, and we couldn't even get rid of that so-called temporary 5p reduction this year, despite the fact that prices are a good 40p a litre below what they were a year ago. So, we've baked in another cut to that particular tax.

Two other sort of quite big measures, though, in the budget, one was on pensions tax relief, an increase in the annual allowance, that's the amount that you can put into a pension free of tax each year and an abolition of the lifetime allowance. So, up till now you've only been able to have about a million pounds in a pension pot, now you can have an infinite amount of money in a pension pot without it attracting additional tax. Could you tell us a little bit about the history of where we got to in the pension tax system, and why we ended up with allowances like we did, and then why the Chancellor has made these quite generous changes.

Helen Miller

So, painting with a big broad brush, there's a good reason for governments to want to incentivise people to put money in a pension to ensure they have enough resources to pay for their retirement. One of the ways the government's tried to help people do that is by giving them pretty hefty tax breaks that are associated with pension savings. But there was a concern that, we don't want those pension tax breaks necessary to go to everybody for as much as you like, so, you can end up in a situation where very rich people get huge amounts of tax breaks and governments wanted to put some cap on how much tax relief people could get. The way they did that was to put on both annual and lifetime limits on how much could be saved in a pension. Now governments have been moving those around quite a lot, but in general, in recent times they've been becoming down, so the amount you could put in a pension got smaller, people could put less and less into a pension both every year and and overall over their lifetime. That's now changed again this year, in this budget, so now people can put in more each year, and as you said, importantly, there is now no limit on what can be saved overall.

I think what's worth saying, stepping back, is that I think there is no good reason why the government should cap what people want save in a pension per se, if people want to save lots in a pension, that should be fine. The issue here is really about the tax relief that comes with that saving, I think there is a good reason to say for somebody who's already got many millions in a pension, they're not the people that we are worried about under saving for retirement that's not a good use of targeting our pension tax relief at that group. But the way to get around that is not to cap how much people save overall, it's to cap the tax relief they can get. And actually, the budget we've just had did go somewhere towards that, the 25% you can get tax free out of a pension has been capped, at the current roughly £1 million. So, there has been a cap in that tax relief, but there are still some other beefy tax relief sitting there, just to highlight one, you can pass on a pension completely free inheritance tax, that is a bad policy anyway, but now, you can pass on an unlimited, amount because you can put lots and lots in a pension and pass that on.

So, you know, what we have here is, big picture, maybe some good news that the government is not capping pension saving, and good that they're capping the relief more directly, but still lots of other relief that are far too generous and that really need to be dealt with. Especially things like pension tax where you get large amounts of money escaping tax entirely.

Paul Johnson

Yeah, complex set of reforms, and just to be clear, the tax-free lump sum is a quarter of a million, it's a quarter of the million pounds that you can have in your pension pot. And the reason the Chancellor gave for increasing these allowances and abolishing the lifetime allowance he gave two reasons. One, he said he was concerned about doctors in the NHS leaving work because it wasn't worth their while working. And the other was he thought that making these changes would actually have an impact on the number of people more generally in work. And I have to say, I think if he's really concerned about the NHS pension scheme, then he should have done something to the NHS pension scheme rather than something to the entire tax relief system. And I think the chances of this making a measurable difference to the number of people in work are extremely low. And indeed it, it could go the other way, if you put more money into your pension, you may feel you can retire a bit earlier. I think my real worry about this, and we'll come onto a similar worry about corporation tax in a minute, is that we've got no idea what the tax strategy is here. He's just reversed a sort of ten years of conservative party changes, he's done nothing as you say about limiting some of the other egregious reliefs system of taxing pensions. And he seems to have been blown by the wind when frankly, a few really rather highly paid hospital consultants have pushed him to make a billion pound a year change to the tax system. What I'd really like to see is some genuine sense of direction.

And talking of genuine sense of direction, let's come to corporation tax. We had a genuine sense of direction, didn't we? We had a decade of the corporation tax rate coming down from 26% to 19%, and a general sense we had a government that wanted low rates of corporation tax. Then a couple of years ago, Rishi Sunak suddenly announced it's going to go up to 25%. And then in this year's budget Jeremy Hunt has suddenly come up with another enormous change to the structure of corporation tax, the full expensing of investments. First of all, just tell us a little bit about what that means.

Helen Miller

Sure. When a firm invests, so they could be buying a tractor or buying some new desks for an office or, building a new building, they can deduct the cost of their investment from their profits when working at how much they're going to be taxed. But exactly how they could deduct that investment depends on a complex set of rules to do the capital allowances rules. So, some investment can be deducted immediately, and some investment you get to write off over a number of years. And the change yesterday basically means that now, for all plant and machinery investment, you can immediately deduct it from your tax, at least for the next three years. And that basically is a more generous treatment. So, investment costs can be deducted more quickly, that's going to be good for investment incentives overall.

Paul Johnson

That's good for in investments overall, but the two things I think we're worried about here aren't there. Let's start with the first one, which goes back to what we were talking about with regard to the public finances, this is limited to three years and then officially, at least, this lovely new full expensing is going to go away again, partly because that makes it possible to beat the fiscal targets that Ben was talking about. Do we think this is sensible?

Helen Miller

Definitely not. So yes, you're right, it's 10% for three years, and regardless of whether you think it should be temporary or not, the reason he's made it temporary is definitely not sensible. So, what's basically happening here is that the policy comes in place for three years as a revenue cost, then the policy stops because investment would've been pulled forward to take advantage of those new generous allowances, actually, after policy, there's a revenue boost for the government because investment falls. So, there's a very clear timing of government revenue here that happens to help the government scorecard, and that is absolutely not a criteria you should be using to set corporation tax.

On the sort of really economics of should this measure be temporary, I think the answer is no. We're not in a weird economic period now where we need a sort of, a short run boost to investment, quite the opposite, we're in a period of long run sort of low business investment in the UK, we need a long run solution to that, we need a stable corporation tax base that makes companies want to invest. And I think it's true in all areas of tax that you want a stable system. I think it's particularly true when you're talking about business taxes, because firms are making very large multi-year decisions about whether to basically commit very large sums of money to these investments. Having a corporation tax regime that I think literally has changed every year since 2010, is not a good way to give companies the certainty they need to decide whether their investment is a good idea or not.

Paul Johnson

And sadly, that has that in common with the pension tax regime we were just talking about. No one's got any idea whether it's going up, down, or round and round, mostly round and round. The, and indeed it's not just that the Chancellor will get more money in, in four- or five-years’ time because this is temporary. Actually, the projection are that the temporary nature of this will mean that company investment will actually be lower in five years’ time than if this had never happened, which is not a sensible way of running a whelk stall.

The other issue of concern, I think Helen, is that different ways of investing get treated very differently. And whilst overall you might think just writing off your investments against corporation tax straight up front makes sense, it matters how you finance that, and in particular you find that this gives huge incentives for firms to finance their investments via debt?

Helen Miller

Yes, so we often are used to looking at average numbers, but it's really important I think, in this area, to dig beneath those and look, as you say, across different assets. So, what you're investing in, whether it's a tractor or a computer, or a piece of software, and whether you're financing it by equity, so by having some people buy some shares in your company, or whether you're having it, a bank loan, all of those things and how they're treated in the corporation tax base have a big effect on the incentives created by tax. So yeah, at the moment, equity finance investments under this new regime will be in the right place, by which I mean tax will no longer be discouraging people from making those investments. But for debt finance, because people can deduct now both the full cost of the investment and the financing costs, the interest costs, the systems basically allowing them to deduct too much. So, you can be in this extremely perverse situation where an investment before tax could be loss making, it could be a commercially bad idea that shouldn't happen. But after tax, because of the allowances that are so generous, it can actually make the company better off. So of course, you want more investment in the UK, that would be great, but we don't want investment of any kind. We want investments that are commercially viable, good for productivity that companies want to do, not that are being driven by these tax incentives. So again, it's a case where, the government's making fairly substantial changes to the corporation tax, but without a clearer, more holistic view about how to design the corporation tax base properly, what we need is proper reform to the base that is stable, that doesn't create perverse incentives like a humongous subsidy to debt financed assets, and that doesn't change all over and, and remove certainty and, and we just didn't get that yesterday.

Paul Johnson

That's extraordinary, isn't it, that we have a tax, a corporation tax, which actually incentivises people to make loss making investments, absolutely extraordinary. We could on about tax for ages, we are after all the Institute for Fiscal Studies, but we probably need to move on. I mean, Christine has been sitting here patiently for a while, waiting for, waiting to tell us about the childcare changes, so that's the third leg of the big story in in this springs budget. And I think probably the thing for which this budget will be remembered potentially in ten years’ time, and potentially after many of the recent fiscal events have been long forgotten, because Christine, what we've seen, I think it's fair to say, is a significant and no doubt permanent extension in the scope of the welfare state.

Christine Farquharson

I think that's absolutely fair to say. And you were talking to Helen about a long-term strategy and a long-term trajectory, that's really what we've seen when we look at the early years, if you go back to 2000, we spent around a billion pounds per year on subsidising childcare and early education, that then doubled in real terms by 2010, it's then doubled again in real terms since 2010, and with yesterday's announcements, it's set to double yet again by the time we get to 2027, so we'll be spending around 8 billion pounds a year. That's a really extraordinary change to have seen over less than thirty years and really reflect the different and probably increasing demands that parents are putting on the state.

Paul Johnson

And a very good example of how spending in particular areas can ratchet up in ways that almost certainly weren't intended when the first few pounds of spending was put into this area. So, what the Chancellor did was extend what's called the thirty hours of free provision to the parents of children age of between nine months and three years on, up, up to the end of the point at which they're two years old, for parents who both are working, can you just put that in the context of what the current provision is? So basically, we've, we've extended to two-year-olds and below some current provision.

Christine Farquharson

That's right. So childcare support in England is ridiculously complicated at the moment. We have something like eight different programmes to try and help parents with the cost of childcare, it's really hard to navigate, it's really hard to work out what people are entitled to, let alone to claim it. But the three big ones for what's called the free entitlement or the funded childcare hours, we have a universal fifteen hours for all three- and four-year-olds, we have fifteen hours for some disadvantaged two-year-olds, and then we have this thirty-hour offer. At the moment that's for three- and four-year-olds in households where all adults are in work, what the Chancellor has done is he said he's going to extend that all the way back down to nine months, so, capturing children from the end of maternity or parental leave, all the way up until the time that they enter school. But that's only if they're in working families, what we haven't seen is a similar increase in the universal entitlements for those children at younger ages.

Paul Johnson

And that's because this is explicitly a policy designed to get more parents and particularly more mothers into work. So, this isn't, as it were, aimed at the welfare of children, this is aimed at, in the Chancellor's words, improving the work incentives for their parents.

Christine Farquharson

Very much. So, if you look at how spending on childcare in the early years is targeted at different groups, this really completely blows out of the water what we saw before. Up until this year, we spent around half of our total childcare budget on universal programmes that it didn't matter how much you earned or how much you worked, you just got that by virtue of your child being three or four years old. That universal spending is going to fall to about a quarter of the total pot by 2027. By contrast, the share of spending that we target on working families is going to roughly double from about 30% right now, to more like 60% in 2027. But there's more to this here too, because although we might look at this and say, the Chancellor really wants to improve work incentives and get people back into work, that's part of what he's doing, but part of what he's doing is paying families for childcare that they're already using for hours, that they're already working. And actually, we reckon that's about 5/6s of the total childcare spending through this policy is going to go on childcare that parents otherwise would've bought for themselves. So, actually, I think that looks even more like a policy aimed at supporting parents with the cost of childcare, even more so than one aimed at helping parents to work, and certainly not one that's about child development and early education.

Paul Johnson

Yeah, I think that's really important. And of course, this is one of the things that makes this politically viable and popular is that, as you say, the vast majority of this money is going to be a straightforward transfer to families currently paying for childcare, who would've paid for childcare when new children come along, which is a perfectly reasonable way of using money if you want to support that group in the population. But you shouldn't pretend that most of this money is going to increase the numbers of people in work, we don't know how many people will move into work, the OBR thinks around 70,000 additional people in work as a result of this, but with a large amount of uncertainty around that. But in the end, this will no doubt be wildly popular among people who benefit, but it is mostly a transfer from the taxpayer to families with one- or two-year-old children.

Christine Farquharson

I think that's right and I'd pick up on the point you made about this, that's not a stupid way to want to spend your money, it's true that families with high childcare costs for their young children, it's really expensive, and for some families that is a genuine burden, this is an expensive period of life, it's not crazy to want to help families, to subsidise them to smooth those costs. But the way that the Chancellor's chosen to do that is by intervening in quite a significant way in the childcare market. The government right now sets the price for about 50% of the preschool childcare hours that are delivered in England, after this reform, even before anybody changes how much childcare they use, that's going to rise to about 80%. And so that means that the pressure on White Hall to get the funding rate right for those hours has just ratcheted up enormously. Now, if all you really want to do is support families with young children through quite an expensive period of your life, there are other policies available to you, things like Child Benefit, that would let you transfer that money without necessarily potentially having these big impacts on the availability and quality of the childcare that we all rely on.

Paul Johnson

And the really important point here is, as you say, White Hall has to get it right when it determines how much goes to childcare providers in respect of each child, put too little in and they won't be able to do it, or they'll do it at the cost of very poor quality, or they do it by charging an absolute fortune to the few people who are paying privately, give them too much and you're wasting public money. So, a really tough judgment of the kind that governments are not necessarily very well placed to make one.

One, one last point, and this probably sounds a little niche to listeners, but it is quite, quite an interesting one, we've talked about this as if everyone in work is entitled to this subsidy, but actually, if one partner earns more than a hundred thousand pounds in a year, then you're not entitled to it. And indeed, if you earn £99,999, you are entitled, and if you earn a £100,000 you are not. So, what's the consequence of that?

Christine Farquharson

The consequence of that is that parents who are facing a choice of whether or not to take that pay rise that would take them over that £100,000 threshold are going to have to be thinking very carefully about that decision. Indeed, in strict financial terms, once you take into account the childcare costs of a couple with two very young children under the age of three, paying for forty hours a week of childcare, they would be better off, at any point between earning £100,000 a year and earning £135,000 a year, they'd be better off saying no to that pay rise and sticking at £99,900. Or they'll have to think about using the new freedoms for pensions allowances, and really topping up and maxing out their pensions. Which in any way is a bit of an odd way of thinking about the kind of stage of life that we want people to be maximising pensions.

But I would also say that this is, this ties into a broader question about the design of this policy. If this a £100,000 cliff edge is one place where actually the labour supply incentives from this policy perhaps aren't quite as clear as we might think that they are. There are other oddities here too, at least under the current thirty hours offer, there's some amount of waiting period baked in, because parents have to apply, they have to show that they're eligible, which means they have to show that they're already working, and it takes a few months for that to get sorted through before those thirty hours become available. If the government is going to replicate a similar system, now all the way down to those children aged nine months, we're going to see a lot of families being expected to stump up for childcare costs at the beginning of their move into work, before being able to claim those thirty hours. That's particularly odd because in his budget, the Chancellor tried to remove some of those upfront barriers in other parts of the childcare system, notably universal credit subsidies for families on low incomes. So, trying to get labour supply done through a policy that was initially designed as an early education offer, leads to a lot of real oddities about whether the policy actually looks like what we would optimally have if we have that goal in mind.

Paul Johnson

That's fascinating stuff, particularly that difference now between the universal offer and universal credit, universal/ universal credit, that could be very confusing. And absolutely astonishing what you just said about you could increase your pay by £30,000 and still be worse off if you're tipping over that a £100,000 mark. Ben, you wanted to come in?

Ben Zaranko

I just wanted to ask Christine a question as our in-house childcare guru, given that we, if you have an income over £100,000 and you want to send your kid to a state primary school, we don't withdraw that access and we don't charge them for it, what's the thinking here behind not doing that for this almost universal childcare offer?

Christine Farquharson

Yeah, I think that's a really good and important question, and I would say that it has something to do with the fact that a hundred thousand is a nice round, shiny number that seems quite salient. The reason I say that is because it's been a hundred thousand since this policy was introduced, it's a hundred thousand when we look at tax-free childcare, you also lose access to that subsidy when you cross that a £100,000 mark. And so, I think this is part of the government trying to say we want to support working parents, we're aware that means our policy, doesn't look progressive in traditional terms because those families earning more are going to benefit more from the support because they usually have higher childcare costs, and so we want to introduce something that looks like a means test, even if it's really high up the income distribution. I think the consequence of that is we end up with these really perverse incentives in the labour market that affect how much people want to work, affect how much people want to earn, which seems to be exactly at odds with what the Chancellor really wanted his budget to do in the earlier space.

Paul Johnson

It's also interesting that a £100,000 mark for the last thirteen years, I think, has been the point at which your marginal income tax rate rises from 40% to 60%. Not many people know that, but on incomes between a hundred thousand and £125,000, you pay an income tax rate of 60%. I think the message of all of this is don't tip over £100,000, if you get to £95,000 stop working anymore.

Christine Farquharson

Or use those nice pension freedoms.

Paul Johnson

Yes, or stick a load of money into your pension. Absolutely, that's may, maybe that's why we got the additional pension freedoms. Thank you, Christine.

I just wanted to come back with one final thing before we wrap up, let's just talk just a little bit about what's happening to living standards, because I think that's very, obviously very closely related to this issue of Christine's been talking about, where part of, actually a large part of the reason of this childcare subsidy is to help people with childcare costs. On the other side of the ledger, we've got this big increase in income tax coming in, but put this all together and we are looking at deep reductions in living standards over this couple of years and stagnation over, over a long period.

Ben Zaranko

Yes, the next two years, the year in progress, and the next one, are not going to be good. They're going to be slightly better than we previously thought, they were previously expected to be absolutely catastrophic, then I, now they’re only meant to be terrible. But still, the two worst years on record for household living standards under the OBR forecasts. Even by 2027 living standards will be no higher than 2019, basically where they were in 2017. That’s another lost decade, I don’t know how many decades we've lost now, but it's certainly more than one. Just really bad news, and that's why there was some positivity in the Chancellor's announcement, he was trying to sell a positive message and he was talking about improvements in the growth forecast and so on. The challenge is that it probably won't feel that way to lots of households this year, it’s going to be a very tricky period, and we shouldn't lose sight of that even though maybe things aren't quite as bad as we feared before Christmas.

Paul Johnson

And I think on that cheery note, we should probably come to an end, we've had a lot to talk about and actually we could talk about many other things that were in the budget, and in the Office of Budget Responsibilities figures. A little bit of cheer in terms of the way the economy's going, a little bit of cheer on the public finances, some nice help for families with children, an effort to help with investment, though stymied by the silly way in which it was introduced. A bung to doctors and some other high earners who want to put money into a pension, absurdities, again around fuel taxation. But I think the big, the big picture here is that the economy is still smaller than it was back at the end of 2019, it's not growing this year, household incomes because of the big surge in inflation, and also partly because of the big increases in taxes, are going down and they're going down quite fast. And we're in the middle of a very, short and very quick increase in the tax burden, and a long drawn-out stagnation in household incomes, which is not going to leave people feeling desperately positive after all of this. I think we, we might give Jeremy Hunt a seven out of ten for effort on this budget, but probably no more than five out of ten for attainment, given that his efforts did seem to go awry, rather, when it came to some of the announcements that he made.

Anyway, that is it for us on the Spring 2023 Budget, no doubt we will pick up many of these themes as we do our podcasts through the year. So, thank you for listening to this special episode of the IFS Zooms In. To see more of our work, visit www.ifs.org.uk, and to further support us, do please consider becoming a member for as little as £5 a month, you can find out more in the episode description. See you next time.