Fiscal flies and spiders, and discounting the pennies

Afternoon all,

This week marks a truly momentous moment in the British policy landscape. What do you mean you haven’t noticed? In this moment, your inbox contains no less than the three-hundredth edition of Top of the Charts.

A lot has changed since TOTC first started rolling off the RF assembly line in the halcyon days of March 2018. In the six and a half years since that first post, we’ve had five different prime ministers across two governments. More worryingly, the cost of living has risen by 26 per cent, while GDP per person has risen by less than 1 per cent in real terms. We’ve covered a lot of ground in the interim, from baby names, to woefully inaccurate pandemic predictions (a six month crisis!), and distributional analysis of the price of eggs.

Some things haven’t changed much though. In our very first Chart of the Week we highlighted the divergence between wealth as a share of GDP and revenue from wealth taxes as a share of government income. And just this Monday, we held a conference to discuss how wealth and savings policy should be meeting the changing shape of our economy.

Hopefully by March 2031, for our 600th edition, we might be able to feature a slightly different COTW. Have a great weekend,

Mike

Interim Chief Executive
Resolution Foundation

Flatlining foreigners. Many have mocked the size of the Draghi report on European competitiveness – all 400 pages across 2 reports – but it’s a serious, fact-filled account of why the EU position in key sectors has weakened, and also sets out a detailed case for a joint, coherent industrial policy strategy. Although many European countries are doing better than the UK, Europe too has seen a productivity slow-down. That has been hidden somewhat by having more people work and a favourable global environment, which Draghi argues have run out of road. The blueprint is straightforward yet ambitious— embrace digitalisation and green innovation as cornerstones for growth. The report calls for hefty investments in digital infrastructure and skills, ramping up research and development, and easing regulatory burdens to cultivate entrepreneurship. Delivering this will require policy coordination across member states (good luck with that…) and hard cash – €750bn-€800bn in additional annual investments, equivalent to 4.4-4.7 per cent of EU GDP. On which note …

Sneaking spiders. The Chancellor and her predecessor have been busy arguing over whether there really is a £22 billion overspend/black hole in public spending this year. It bears a striking resemblance to two flies having a blazing row while they’re stuck in a web and the spider is approaching. The spider in this instance, being the OBR’S fiscal risks and sustainability report. A £22 billion one-year overspend (although some will probably affect future years too) really is small fry for a country that is getting older, and a planet that is getting warmer. The OBR projects that the spending pressures from these shifts could increase government spending as a share of GDP from 45 per cent today, to 60 per cent in the 2070s – an increase equivalent to around £400 billion in today’s money! Personally, I don’t think we should take these 50-year forecasts too seriously. But they do help to put a lot of the arguments being made today back in their box. It’s just not credible to think that taxes don’t need to rise in an ageing society, or that wavering on net zero is good for the public finances. On a more positive note, the OBR notes that these spending pressures can be absorbed without debt increasing as a share of the economy if productivity growth returns to its pre-financial crisis trend. So can we all just focus on achieving that goal? Please?

Quantifying queerness. The economics of sexual orientation and gender identity is, it’s fair to say, not a field that existed thirty years ago. But that is no longer the case, so this literature review of emerging trends within that field is both timely, and intriguing. Social attitudes, legal prohibitions, and in some cases government policies have, until recently, limited the freedom of LGBTQ+ people to study, access healthcare and find work. Happily, social attitudes have steadily grown more tolerant towards LGBTQ+ people in the US and Europe (although the outcomes for students who are gender non-conforming or same-sex attracted are not ideal: they’re more likely to be bullied, and to begin using drugs). The most surprising finding for me was that lesbian women persistently experience a wage premium (when compared to straight women) and gay men persistently experience a wage penalty (when compared to their straight counterparts). Look out for more from this young and growing field of economic analysis.

Weighing wealth. This recent LSE paper takes a historical look at ethnic inequalities in wealth in England and Wales, all the way back to 1858. The innovation is in using name classification software to assign a probability that any surname belonged to a particular ethnic group. Having done so, the author finds that, historically, names tagged as a non-British ethnicity have average wealth (at death) 2-5 times that of names tagged as English, but by 1980, non-British ethnicities had no advantage when it came to wealth. Of course, this masks significant differences within ethnic groups. For example, Europeans tend to pass away with significantly more wealth, compared to Pakistanis, while across the whole time period, the Irish held wealth around 50 per cent of the English average. There’s plenty more results for other ethnicities in the paper too.

Crappy copper. Here’s the latest from the man who suggested we scrap bank holidays… Tim Leunig is arguing for the cessation of copper coins, given that 1p is now worth less than the ha’penny was when it was discontinued forty years ago. It seems like a good pitch – we’re using them less (the Royal Mint didn’t need to make any copper coins this year), our pricing is adjusting accordingly (70 per cent of products have prices ending in 5p or 10p already), and similar transitions have occurred in Canada and Sweden without any inflationary effects. It’s a fair cop(per), Tim.

Chart of the week.

Amid the drama around Winter Fuel Payments (WFPs) this week, Rishi Sunak demanded an impact assessment of the decision to restrict WFPs to Pension Credit claimants, and the Government has duly published some stats in response (RF explainer here). It shows that fuel poverty in England is due to fall this year (from 13 to 12.7 per cent), and that restricting WFPs will have no effect on fuel poverty levels. If that raises eyebrows, note that the last Government changed the definition of fuel poverty in England back in 2021 and it now excludes all energy efficient homes (an EPC rating of A-C) – i.e. two-in-five pensioner households in England. The new measure might tell us about households’ energy needs, but it doesn’t tell us how many struggle to pay their energy bills – which is how most people would define fuel poverty (still officially so in Scotland and Wales). We now call this ‘fuel stress’ and will publish new analysis on it next week. But this week’s COTW looks at the bigger picture behind WFPs and their role in supporting pensioner incomes. They were brought in in 1997 when the basic state pension was less generous, particularly so for the millions of women who didn’t fully qualify it. But a lot has changed since then – the real-terms value of the state pension has soared, and it has become a near-universal entitlement. So, even without WFPs this winter, universal pensioner benefits will only be around £100 lower than last year in real terms (the average value of the energy price cap is set to be £390 lower in 2024-25 than in 2023-24), and £2,600 higher than when WFPs were first introduced. That doesn’t mean poverty is a problem of the past – far from it – we just need policies that fit the problems of today, not the 1990s, and WFPs miss the mark.