We’re going on a growth Hunt

The UK is forecast to have gone through the biggest energy and inflation shock since the 1970s while avoiding a recession and with unemployment peaking at just 4.4 per cent. In contrast, the mid-1970s energy shock was accompanied by a recession with a 3.9 per cent peak-to-trough fall in GDP.

Typical real household disposable incomes are on track to remain lower by the end of the forecast period (2027-28) than they were before the pandemic (2019-20). If the (slow) growth of the last decade had continued, incomes would be £1,800 higher than currently projected for 2027-28.

Taxes as a share of GDP are expected to hit a 70-year high of 37.7 per cent by 2027-28 – a 4.7 percentage point increase since 2019-20, equivalent to nearly £4,200 extra for every household in the UK. Despite this, the Chancellor only has one-quarter of the average fiscal headroom of the last three Chancellors, and would not meet the fiscal targets set by Chancellors Sunak, Hammond or Osborne.

The Chancellor announced the biggest increase in childcare support on record. As well as encouraging more parents to work it will make it worthwhile for many to work longer. Under the current childcare system, a single parent of a one-year-old earning the National Living Wage would see their income fall after childcare costs by £370 if they moved from 25 to 35 hours of work a week. However, under the new system, the same single parent would receive an income boost of £700. The richest fifth of households are set to gain £180 on average from the extra childcare entitlement, compared to £130 for the middle fifth of households, and £20 for the bottom fifth.

Raising the annual, and scrapping the lifetime, allowances for tax free pension saving cost around £1.2 billion and are expected to increase employment by 15,000 – a cost of around £80,000 per extra worker. And even those employment gains may be overstated, given that very large wealth boosts (someone with a £2 million pension pot has just seen the value of their pension pot increase by almost £250,000) will actually encourage some people to retire earlier than they otherwise would have done.

The Chancellor chose largely to ignore pressures on public services in this Budget. Unprotected departments face 10 per cent cuts to real day-to-day spending per capita by 2027-28 – rising to 14 per cent if the newly announced aspiration for defence spending to rise to 2.5 per cent of GDP is met over the next parliament.

A £28 billion three-year increase in investment allowances represents the fifth major corporate tax change in just two years – illustrating the lack of certainty that has frustrated businesses. The policy will deliver a temporary 3 per cent boost to investment, when what Britain actually needs is a permanent 30 per cent boost to catch up with our competitors (France, Germany and the US).