Chancellor succeeds in boosting employment but not investment against a better, but still bad, economic outlook

Faced with an economic outlook that has improved in the short term but remains weak, the Chancellor today (Wednesday) delivered a major policy package that is likely to be more successful at getting Britain working than investing, the Resolution Foundation said in its response to Budget 2023.

Following energy price falls, the OBR has significantly upgraded its short-term economic outlook. The UK is set to avoid a technical recession in 2023, and see the sharpest one year fall in inflation since the 1970s.

Forecast changes reduce borrowing by £24.8 billion this year, and by nearly £120 billion cumulatively over the five years to 2026-27.

The Chancellor has chosen to spend an average of just under two-thirds of his forecast improvements on policy measures from next year onwards – on cost-of-living support for households and investment incentives for firms in the short term, and measures to boost activity rates in the longer term.

Measures to boost employment include the welcome extension of 30 hours free childcare to children of working parents from nine months old. This will provide a significant income boost for parents when childcare costs are highest – average childcare costs for working parents with children aged 1-2 are nearly four times higher than those with children aged 5-11 – encouraging more mothers to work, or work more hours.

Increases to the annual, and abolition of the lifetime, tax-free allowances for pension savings are a significant giveaway to higher earners who already benefit most from our approach to pension tax relief. The OBR forecasts that these two measures will increase employment by 15,000, at a cost of around £47,000 per job. A tax giveaway this big may actually see some workers choosing to retire early, or using their now uncapped pensions saving to avoid inheritance tax.

These carrots of financial support for better-off parents and those with huge pensions will largely benefit middle-and-higher income households, with two-thirds (67 per cent) of the new support going to the richest half of households, while the poorest fifth get just 6 per cent. The Chancellor also announced sticks to push more people into work, with increased benefit conditionality for poorer parents and couples where only one partner currently works.

The scrapping of the Work Capability Assessment (WCA) amounts to the biggest change in disability benefits in a decade. It will rightly be implemented slowly given that there will be significant winners but also losers. Up to 650,000 people currently receiving support after going through the WCA do not receive Personal Independence Payments. In future, this group, which includes people recovering from surgery, are likely to see support cut back.

In aggregate, the OBR thinks these measures should raise the size of the workforce by 110,000 or around 0.3 per cent in 2027-28. This is welcome, but smaller than the boost to employment from higher migration of 160,000.

On business investment the Chancellor unwisely introduced yet another temporary regime for corporate taxation, with full expensing of qualifying investment over the next three years. This will encourage the biggest firms (99 per cent of firms already receive 100 per cent relief due to the £1 million Annual Investment Allowance) to bring forward investment, but not to increase it. In fact, business investment in 2027-28 is forecast to be four per cent lower than it was in the Autumn.

In the shorter term the Chancellor delayed the Energy Price Guarantee rise and scrapped the fuel duty increase, providing a £225 boost to a typical household next year. These are small measures compared to pre-existing measures to support households with rising energy bills, with support totalling £68.9bn – or £2,460 per household – over this year and next.

Even with this help, family finances will remain under strain from higher energy bills today, and tax rises tomorrow. The Foundation’s analysis shows that the permanent effects of tax and benefit changes in this parliament will boost the incomes of poorest fifth of households by £444 per year, while reducing middle incomes by £694, and the richest fifth of households by £2,067 per year.

Economic growth over the parliament is forecast to be the weakest since Margaret Thatcher’s first term – at just 0.5 per cent per year. The weak growth holds back incomes, with the current parliament set to be the worst on record for living standards. Real household disposable income per person is forecast by the OBR to still be 5 per cent (£1,200 a year) lower in Q1 2025, than it was in Q4 2019.

Torsten Bell, Chief Executive at the Resolution Foundation, said:

“Against a better, but still bad, outlook for the British economy, the Chancellor has announced a more action packed Budget than many expected.

“It is likely to be more successful in boosting employment than investment, with a significant improvement to childcare support standing out. It will provide a welcome income boost for families at a time when childcare costs are at their highest, while also encouraging more parents to work, or work more hours.

“However, tax changes to discourage early retirement – an issue that looks to have largely disappeared after the mid-pandemic surge – are hugely regressive and wasteful. It’s a big victory for NHS consultants but poor value for money for Britain.

“Announcing yet more temporary arrangements for corporate taxes is unwise, contributing to ongoing uncertainty and doing nothing to permanently raise the levels of business investment in the UK.

“Today we got a better sense of the Chancellor’s growth strategy – a mix of carrots and sticks to help people to work more, but not enough of an investment-led productivity drive to help those workers earn more.”