Trade war respite, recession worries and the second coming of EVs

Afternoon all,

Huge changes announced by the Government this week. Complicated but important reforms to Universal Credit to encourage more people into work, plus a massive cut to eligibility for disability benefit that doesn’t have much to do with work at all. We won’t know the full impact until the OBR releases their take, but you can get our quick-fire analysis here.

Speaking of the OBR, a few in-person tickets are left for our post Spring Statement event, with Richard Hughes, Stephen Bush, and Linda Yueh.

Plus, a lifelong ambition ticked off this week as I made it on FT’s Alphaville! Follow me on Bluesky to never miss out on the fiscal effects of quantitative tightening chat…

Have a good weekend,

Ruth

Chief Executive
Resolution Foundation

Rubber, meet road. While certain leaders of certain oppositions might have started the week pooh-pooh-ing net zero, it has been chugging along quietly. This research reveals early signs of a tipping point in our second-hand electric vehicle (EV) market. That means EVs could soon(ish) dominate car adverts. Analysis of Auto Trader data found that 7 per cent of advert enquiries were for EVs in 2023, up from 0.9 per cent in 2019. Plus, last week’s Carbon Brief analysis found that UK oil demand fell 1.4 per cent in 2024 *despite increased road traffic* — thanks to EVs! Remember, EV drivers spend £800 less each year than people driving petrol vehicles, which is why we need to grow the second-hand EV market so that lower-income households can benefit from lower costs, and reduce road emissions.

Stereotypical stoners. Occasionally I find a paper and think – why exactly did this research need to be conducted? But it’s a fun one. The research asks how accurate stereotypes of drug users are. You know the typecasting: marijuana smokers are demotivated and lazy; LSD users are emotionally detached and irrational, and so on. The authors codified the stereotypes through interviews and compared them with self-assessments of users of cannabis, MDMA, heroin, LSD, cocaine, amphetamine and alcohol. The stereotypes are largely inaccurate – although stereotypes of cocaine users (“highly extraverted and achievement-oriented, at the cost of agreeableness and emotional stability”) aligned most closely with the users’ self-image. This research comes in the context of increasing drug use, with 6 per cent of adults globally using a psychoactive substance in 2021.

Trading tribulations. Unless I’m mistaken, this is the first week since inauguration day without threatened (or actual) tariffs. So TOTC is filling a trade war shaped hole in your lives. The EU is fighting fire with fire on tariffs. Thus far, the UK is treading more softly softly. This research warns the EU not to rely on retaliation alone, but to support country-level efforts to diversify and find alternative export markets. This would limit the economic damage of tariffs *and* strengthen the EU’s bargaining position. $245 million worth of goods are at high risk of tariffs in the Netherlands, for example, but countries such as China, Mexico, Canada and India would provide them a viable alternative market to minimise the harm done by American tariffs.

Effective employment. One welcome part of this week’s welfare announcements was big additional spending on employment support. Recent research assesses the impact of a Belgian supported employment programme that offered job coaching and in-work support to disability benefit recipients with mental health conditions. Two and a half years in, participants were 7.5 percentage points more likely to be working than those in the comparison group (receiving vocational training). Increased employment led to a 9.5 percent reduction in monthly benefit costs for the supported group. This shows the difference targeted, employment-oriented support can make in helping people with work-limiting health conditions back into the labour market. The catch? It pays for itself in the long run, *after high up-front costs*. Another reminder that short-term savings are probably not the best route to a functional (affordable) welfare system. For a more UK-specific take, the Shaw Trust recently published their impact report on how employment support helped nearly 20,000 job seekers dealing with poor health or disability.

Something for the weekend? | Statement of intention

There’ll only be one (economic) story in town next week as the Chancellor delivers her Spring Statement. So, what can we expect? It’s basically certain that her narrow headroom has been wiped out. There is more than one way to respond, but the Government have chosen to cut welfare spending – reforms that will be sharply felt in the pockets of affected families across the country.
The Government has not provided numbers on how many claimants will be affected. So, watch out for the detailed Impact Assessments of these reforms alongside the Spring Statement. Our best guess is that between 800,000 and 1.2 million people will lose PIP eligibility, and will lose out on at least £4,000 annually by the end of the decade. I’ll also be watching the OBR’s inflation and wage forecast closely – if the Government is ruling out tax, there must be a fiscal upside hiding somewhere.

For context, The Bank (as expected) held interest rates steady at 4.5 per cent yesterday, but interestingly said that they hadn’t changed their view on the inflation forecast published last month despite (massive!) falls of around 20 per cent in gas futures prices and 7 per cent in oil prices since then.

Public spending totals will be deeply revealing as well, amid rumours this week of further cuts to unprotected departments, in an effort to meet fiscal rules.

But this is *NOT* a Budget. I expect the Chancellor (desperately seeking stability) will endeavour to squeak through doing as little as possible. Welfare reductions, spending cuts, and some tax-boosting inflation could just mean she can avoid turning to tax policy – this time. But OBR forecasts of Government borrowing vary by £19.4bn*, so we could be back here again very soon….

* Or 0.7% of GDP. Refers to average absolute difference in borrowing in final year (or penultimate if no corresponding previous forecast for final year) since June 2010.

Chart of the week

Work has been the theme of the week because a) the Government announced their Pathways to Work Green Paper (RF analysis here if you’ve missed it) b) the ONS published the latest labour market statistics (explainer thread here) and c) we’re recruiting! (apply here). We’re going with b) for COTW… In the absence of decent ONS data on the jobs market (or indeed prices or wealth) we’ve constructed our own employment rate using HMRC payroll data and ONS population estimates. And it doesn’t look good. The employment rate has now been falling for the past 21 months – a fall consistent with the UK being in recession territory. This is a huge worry for living standards, but are there any grounds for optimism? Well, the difference with the current ‘employment downturn’ and previous ones as that it’s being driven by a rising population rather than falling employment levels. While this doesn’t make much difference if you’re out of work – a lower employment rate means you’ve got less chance of finding a job – it does matter if you are in work. Falling employment levels usually means rising redundancies and dole queues. And we’re not seeing any signs of that in the data – yet.