Unsung Britain bears the brunt

Afternoon all,

My son’s hot take on the Spring Statement was “I heard someone say on the radio that Rachel Reeves stuck to her own rules. That’s good. Not like Boris Johnson when he made those rules for everyone then had a party!!” This neatly summarises the two bits of political news that have cut through in his young life: 1) the importance of fiscal rules, and 2) partygate. Something about rules seems to get kids’ attention, but it’s possible the first is more niche to our household than the second.

The Chancellor may prefer my son’s review to our analysis this week. The changes announced are going to have tangible impacts on peoples’ living standards, and many of the cuts will fall disproportionately on the poorest and most vulnerable members of our society.

Keep reading for my first fiscal event TOTC special, where we consider the toll of tariffs, the persistence of poverty and where it’s all likely to leave us in the autumn.

Have a great weekend,

Ruth (with thanks to the whole RF team for the charts, and to Emma Beale and Imogen Stone in particular)

Chief Executive
Resolution Foundation

Oh! What a lovely trade war.

As the ever-dead-pan Richard Hughes pointed out at our post-Statement event this week: “Donald Trump doesn’t comply with the OBR deadlines for policy notifications”. On Wednesday, the Chancellor was reluctant to get too specific about *how* the world has changed, or *who* is changing it, but her words were prescient. Trump’s re-upped tariff threats promptly underlined the multitude of economic shocks waiting to knock on/kick down our door that are not considered in the OBR forecast.

The OBR set out how it thinks higher US and global tariffs might affect the UK in three scenarios (TLDR: retaliation to Trump tariffs; escalation by Trump; all-out trade war). So, what should we expect? In the OBR’s worst-case scenario, the hit to GDP peaks at 1% in 2026-27, settles at 0.75% in the medium term, and almost fully wipes out the current budget surplus required by the fiscal rules. The chart below shows our analysis of how this might play out in UK exports (that’s goods AND services, because even though not subject to tariffs directly, services experience supply chain disruption). Compared with exports growing in line with their past performance, a 20 percentage point increase in tariffs and widespread retaliation could cause a £34.5 billion hit to our exports. So tariffs = bad news for the UK economy.

Meanwhile, on the home front…

The Chancellor (understandably) emphasised the tricky global context on Wednesday, but we had additional grim news yesterday about the domestic context. Child poverty and food insecurity have been rising for three consecutive years. Fingers crossed the IFS are right about this  data being unreliable. But even if it is, the big picture trend – and future forecasts – remain bad. The chart below (hot off the presses) shows our latest projections and make for sobering reading. We forecast 4.8 million children will be in poverty by the end of the Parliament if the Government doesn’t take action. What a week to implement policy that the Government’s own numbers say will push another 50,000 children into poverty.

Chancellors’ choices.

In response to weaker public finances, the Chancellor had to balance the books to meet her freshly legislated for fiscal rules, and to prove her integrity to (my son and) the financial markets. She chose to raise 72 per cent of her total final year consolidation from 800,000 current and future PIP recipients. Yes, fiscal consolidation was needed, but concentrating so much of it on a relatively small number of disability benefit claimants means very tough impacts for those individuals. Those likely include “working people” as PIP is paid regardless of employment status (about one-in-six PIP recipients are in work).

The averages don’t look great either. This chart puts the distributional impacts of the decisions made by this Chancellor side-by-side with the impact of all decisions in the last Parliament.

Looking across Parliaments, this Chancellor’s decisions have reduced the incomes of the lowest income half of the country by 1.4 per cent; with a 0.8 per cent drop in the top half. By contrast, the previous Government’s changes did more to boost the incomes of the bottom than the top (with income growth of 2.5 per cent for the lowest half of incomes and of just 0.1 per cent for the top half). This difference would have been even more marked without Jeremy Hunt’s final flurry of arguably unaffordable cuts to National Insurance.

The total amount the Chancellor had to raise was largely a function of her unenviable inheritance (high debt and high interest rates are at the top of that list). It’s also true that choosing to fund public services (to the benefit of lower income households) through changes to tax and welfare will show up as reduced incomes, without accounting for the increases in living standards in some broader sense. But the fact remains that the way the Government has so far balanced the books is placing the greatest burdens on poorer households.

Chancellors’ justifications.

Let’s get one thing clear – this was an event in which public services kept, and indeed gained, upon the significant top-ups already received in the autumn.  Over the years covered by the Spending Review, real RDEL is cumulatively £1.1 billion higher than it was expected to be in the Autumn Budget.

The cuts were about welfare. This has been justified on the basis that the welfare bill is “out of control”. Is it? As ever, that’s really a question of how you frame the numbers. Spending on working-age benefits as a share of GDP has been essentially flat for the last ten years – but spending on health-related working-age benefits *is* increasing and we did see sharp post-pandemic rises in caseloads. The Government is right to address that trend (even if the way it is doing so is hugely problematic) which seems to go beyond just an ageing and ailing population, and is forecast to worsen over the next few years.

But if we’re going to pick subjects of reform based on fiscal pressure points, where should we look to next? Where else is government spending rising “out of control” or revenue plummeting through the floor? The (selective) chart below might be of some help.

Ok, so the health and social care line here is based on a big assumption that NHS spending is protected in the sense of continuing to grow at the long-run average of 3.6%, as is typically assumed in the analysis of implications for unprotected departments done by us, the OBR and the IFS. Which brings us to a rather big choice – with the NHS such a large proportion of spending it really matters whether they get growth that is either somewhat above or below this assumed amount. However, I’d warn against excessive optimism that just canning NHS England is the answer to our public finance problems – their total staff budget in 2023-24 is around £1.25 billion so eliminating this altogether would shave just 0.2 percentage points off the NHS 3.6 per cent real growth rate.

Where does this leave household budgets?

We revealed in our analysis earlier this week that working-age households with below average incomes (as in, half of the country, with a disposable income up to £32,000 if you’re part of a couple with no kids) are projected to be £500 worse off by the end of this Parliament. The new data on household disposable income out yesterday, doesn’t change the outlook for better or worse. But it does make recent preceding years even worse. The updated chart below shows how real household incomes have grown for the poorest half of the (non-pensioner) population over every (rolling) five-year period since the 1960s. Income loss on the scale we’re expecting over the next five years has only been worse during the early 1990s recession, the financial crisis and (we now learn) the recent cost of living crisis.

Of course, at this stage these are only projections based on current policy and the OBR’s current outlook, both of which will change. In the 2010s, similar forecasts ended up being outperformed by reality – partly because income gains from rising employment were large and went disproportionately to poorer households.

It would, of course, be wonderful if the Government managed to get more people into work and met their ambitious employment target, perhaps reducing youth inactivity in the process. Using the spending review to bring forward their proposed new employment support (which currently doesn’t fully kick in till long after the benefit cuts have begun to bite) would certainly help on that front. Despite strained finances, the Treasury has found some budget in 2025-26 to put towards housebuilding and defence, so it’s a shame there wasn’t any money down the back of the fiscal sofa to also tackle those NEETs straight away.

See you again in the autumn.

A question I’ve heard a lot this week has been “when do we get to do all this again?”. Shout out to the OBR for combining their legendary headroom chart with their less well-known stochastic analysis of the probability rules are met in outturn (Chart 7.5 in the EFO: spoiler alert – low headroom on a central forecast means about 50 per cent, and the difference between £9.9bn and £9.8bn was not something that should have troubled the Chancellor in her decisions).

That chart helps to visualise the probability that the current budget will *actually* be balanced in five years’ time (assuming the Government doesn’t make any policy changes….). Let’s think about the chances of a Groundhog Day fiscal event where headroom is wiped out JUST from the changes in interest rate costs. For that to happen, interest rates would need to rise by 0.6 percentage points relative to the rates used by the OBR. The bad news is that rate rises since the OBR’s forecast closed have already got us a quarter of the way there – we now (as of close Thursday) only need ~0.42ppts of further rate rises.

How likely is that? This chart tracks the frequency of various changes in gilt yields over 120 working day windows, going back to the 1970s. Based on the way gilts have moved over the past 45 years, that leaves us with about a one-in-five chance of using up our headroom (again) just on debt servicing costs. But we are in a volatile world. Looking only at gilt yields in the post-Mini Budget era (which is obviously a smaller sample size, so harder to draw conclusions from), that would be more like a two-in-five chance.

Time will tell on that front, but in the meantime the government will seek to enshrine the cuts and freezes to disability benefits in legislation. In a challenging context, the Government is right to be prioritising growth. But until it arrives, the big question is who should carry the costs of adjusting to a different kind of economy.