Snap Analysis 6 March, 2024

Reform analysis: Spring Budget 2024

It was pitched as the Government’s final fiscal hurrah before a general election, but in the end, with so much already trailed, it felt a bit of a damp squib.

At one point tax geeks and wonks thought the Chancellor might be leading up to announcing a genuinely radical policy — the merger of national insurance (NI) and income tax — but his preamble ended instead with confirmation of a further 2p cut to NI. Hunt did say “because we believe that the double taxation of work is unfair. Our long-term ambition is to end this unfairness”… perhaps that’s showing some manifesto ankle?

The price tag for that hefty NI cut — applied in April, just 3 months after the January cut — is £10 billion. As we noted in November when the last cut was announced, if you’re going to cut taxes, NI is a good shout (it’s better targeted than income tax and incentives work, which the OBR estimates at an additional 100,000 FTE workers).

Ending the non-dom regime and extending the energy windfall tax by another year are the biggest revenue raisers.

The fiscal rules remain a farce. The OBR state: “Borrowing is still projected to fall in each of the next five years thanks to tax as a share of GDP rising to near to a post-war high, debt interest costs falling, and per person spending on public services being held flat in real terms. This is just enough to meet the Government’s fiscal rules on our central forecast with underlying debt falling as a share of GDP in 2028-29 by a historically modest margin of £8.9 billion.”

Apart from… dig further into the small print (specifically page 130 of their Outlook) and you find £4.5 billion is the more likely ‘headroom’ figure. Why? Because the £8.9 billion builds in a reversal of the 5p cut to fuel duty and its re-indexation, and what politician is going to do that?

Of course we already know the departmental spending envelopes for beyond the current spending review — which ends March next year — are pie in the sky. So whose really taking these projections seriously (which the OBR basically reinforces in just paragraph three on the scale of the risks to their central forecast)?

It’s worth noting that an expected further tightening of departmental budgets to pay for tax cuts didn’t materialise — but then nor did an ambitious cross-government productivity programme (see our analysis below). The only public service to get any real attention was the NHS (also see below).

Perhaps the other indication we have an election coming up, aside from the NI cut, are the number of measures targeted at wealthier households. Eligibility for child benefit has been pushed up the income scale (you’ll have to have a single earner on more than £80k now to receive nothing), the maximum amount we can save into ISAs has been boosted by £5k (who can afford to save £25k each year?), and the capital gains rate has been reduced on the sale of second homes (albeit we’re told that this cut actually increases the tax take).

For more detailed analysis, and our usual good, bad and ugly, please read on!

👍 GOOD FOR

Support for low-income households

Individuals facing personal financial difficulty will benefit next month from the abolition of the Debt Relief Order (DRO) administration charge of £90, removing an unhelpful and contradictory barrier that demanded an upfront payment from people in debt. Government is also improving DRO accessibility by increasing the maximum debt value threshold from £30,000 to £50,000 and the maximum value of motor vehicle an individual can retain. This is a prudent amendment to ensure those struggling with debt are given a viable shot at a fresh start.

Also on debt, the Chancellor announced that the repayment period on budgeting advance loans in Universal Credit will be extended from one to two years. This will effectively halve the monthly deductions from a household’s UC payments if they choose to spread their repayment over the the maximum time. While the Government could have moved quicker than December 2024, this is nonetheless a welcome policy for financially strained households.

Finally, the Household Support Fund, first announced in September 2021 as a temporary measure to help low-income households afford essential items, has been extended by six months. This, again, is welcome — though its important to note that this short-term sticking plaster is no substitute for a sustainable financial settlement for councils.

Striking deals for investments

Following the Autumn Statement’s push for greater private sector investment — underpinned by the announcement of full expensing (a major tax cut for business) — the Chancellor’s speech drew attention to further progress made in striking deals to bring private and international capital to the UK. He points out that Greenfield Foreign Direct Investment (essentially, any new business started by foreign investors) in the UK is now the third highest in the world, behind only the US and China. Which underlines a real sense of momentum around the UK’s ability to woo these “growth sectors of the future”.

In particular, the Chancellor touted a £160 million deal struck with Hitachi for sites in Wales and South Gloucestershire for potential nuclear projects; an announcement by Nissan to build new electric car models in the UK; and an impressive £3 billion investment by Microsoft and Google in new data centres. In a boon for the life sciences, AstraZeneca will also be investing £650 million in expanding its domestic vaccine manufacturing base. All good news for UK plc.

The (slow) devolution revolution

This Budget sustained the Government’s (very welcome) focus on devolution. In addition to four recently announced ‘level four’ deals for Mayoral Combined Authorities (MCAs) — which will feature powers comparable to those now being taken on by Greater Manchester and the West Midlands, but with a significantly slimmed-down version of the ‘single settlement’ — the Chancellor also announced the first few ‘tier 2’ deals for County Councils BuckinghamshireWarwickshire and Surrey Councils will all absorb the functions of the Local Enterprise Partnerships that are being wound-down, and take control of budgets for, e.g. adult education. This is a big moment for the current wave of devolution, as the decentralisation of power visibly shifts from the regional to the county-wide scale.

One important document updated alongside the Budget sets out the useful detail of how the ‘single settlement’ funding promised last year to Greater Manchester and the West Midlands will work. Each settlement will have an outcomes framework negotiated with government, and allow for some reallocation of resources across themes (e.g. between transport and skills), potential adjustments in spending between years, and shifts from revenue to capital allocations and back again. The idea of near-total regional autonomy over such decisions remains pretty distant, though.

Also in that accompanying doc, assurance, oversight, and accountability measures are being firmed up. The Government is planning to make use of a kind of ‘readiness check’ to ensure that each MCA is equipped to manage its single settlement, similar to one called for in Reform’s ‘Devolve by default’ report in January.

The key point of contact between MCAs and central government in this model will be a newly formed Programme Board, chaired and (for the most part) attended by central government officials. MCAs will be required to submit their homework for checking every six months. Meanwhile, MCA Chief Executives will be positioned to assume some of the accountabilities that are usually held by departmental Accounting Officers, though the DLUHC permanent secretary will continue in a ‘systems’ AO role, signing off on outcomes agreements and remaining accountable to parliament and the Public Accounts Committee. Our view is that this will be unsustainable: in the medium term, it would make much more sense if MCA Chief Executives and Mayors assumed direct accountability to the legislature.

Shoring up free childcare 

One of last year’s biggest Budget announcements was a massive expansion of free childcare. Setting aside the merits or otherwise of a policy that sees the bulk of funding going to wealthier families, once you’ve committed, you need to make it work. Today the Chancellor acted to do just that, unusually committing to a formula for uprating the hourly rate providers are paid for the free hours offer for the next two years.

Why is this important? Because if you don’t know what the Government will pay, how are you supposed to make investment decisions and expand your workforce to accommodate increasing demand? In sectors where government is one of, if not the, biggest purchaser of services, this is a very welcome step towards being a responsible market steward.

Boosting NHS Productivity 

It is clear from evidence that increasing staff and money in the NHS has not automatically translated to improved outcomes. The NHS’s decreasing productivity is the most common diagnosis for this dissonance. And so this Budget attempts to counter the marked decline in NHS productivity since 2019, centred around one theme: technology and digitisation.

This was not just a plan to modernise outdated systems, but to accelerate the use of more emerging technologies wherever possible, allocating a hefty £3.4 billion for investment alone. Improvements to the NHS App, a new digital health check, Electronic Patient Records and a single digital access point for NHS services are all extremely welcome. Improving transparency and access for patients is not merely a productivity benefit, but also one of patient satisfaction and better, quicker clinical outcomes.

How data is shared within the NHS is well established as inefficient and fragmented. Aside from improving administrative efficiency, the proposed federated data platform to consolidate all the operational data on different systems could be impactful for continuity of care and research and development. Eliminating back office bureaucracy wherever possible is an obvious open goal — providing all NHS staff with digital passports to improve rostering, upgrading IT systems and piloting AI to automate the clinical coding of notes is a necessary pre-condition to a better functioning health service.

The government expects a substantial return on this investment, with an assumed productivity bump of 2% a year by 2030, despite it having averaged 0.9% for the last 25. This may be optimistic, not least because diagnoses of this productivity problem vary, and many would identify technology as part of but not the entire solution. Insufficient capital investment in estates, high staff churn, hospital management and slow discharge due to problems with social care could easily undermine the productivity benefits of modernised technology.

Irrespective, these measures (if actually achieved) are positive interventions… but as others have pointed out, the money isn’t being allocated until 2025, meaning another year of slow progress (if the money is actually allocated by a new government).

Pensions working harder for us 

On pensions, the Chancellor continued to ramp up the pressure on pension funds underperforming and underinvesting in the UK, building on last year’s Mansion House reforms and Autumn Statement.

Pension funds will be required to publicly disclose their allocation of investments — including their level of investment into UK businesses — and, subject to a FCA consultation, Defined Contribution (DC) funds will have their performance judged by their returns rather than costs. Funds generating poor returns will be prevented from taking on new business.

Encouraging more investment into UK businesses is clearly necessary. Since 1997 across the pensions industry as a whole investment into UK equities has fallen from 53% to 6%. This places limits on UK businesses’ access to capital and thus limits on economic growth. However, it remains to be seen whether simply mandating pension funds to publicly disclose information on their allocation of investments will lead to more investment into UK businesses.

Shifting towards judging DC funds on their returns rather than their costs is similarly necessary. UK pension funds have been accused of focusing upon low costs at the expense of high returns, with estimates that this means a typical saver loses out on an additional £97,900 versus US, Canadian and Australian comparisons. A situation whereby the typical saver is losing out on almost £100,000 obviously needs addressing. However, doubts have been raised about the feasibility of pension funds simultaneously increasing investment into UK businesses and increasing returns.

👎 BAD FOR

'Do as I say not as I tax'

Freezes to fuel and alcohol duty are pretty much an annual event. However, at a combined cost of more than £1 billion a year they don’t come cheap, and considering the Government’s priorities to reach Net Zero and tackle the behavioural drivers of poor health, cutting taxes with a noticeable effect on pollution and problem drinking, risks sending the wrong signals. Though both have a real effect on disposable incomes, there are much better ways to target support — which would be more aligned with government’s priorities.

Wider public sector productivity

The Chancellor wants to treat the NHS Productivity Plan as a model for other public services, as part of an overall drive catchily titled the Public Sector Productivity Programme. His ambition is grand — to get productivity back to pre-pandemic levels (it has fallen by 5.9% since).

Unlike the NHS, the Government has only partially committed to fund findings from Phase 1 of the Policing Productivity Review — relating to measures saving up to one million hours of police time a year, rather than the full 38 million hours a year that were recommended. Why? Perhaps because the investment could cost more than the savings. The biggest bucket of savings suggested by the Review (15 million hours of officer time, c.8,000 officers per year) came from a broad swathe of 64 different science and technology schemes, scaled nationally from pilot levels. It’s simply not feasible to expect policing to do that on-time and to budget, given a poor track record at basic technology adoption.

We at Reform are passionate believers that technology is the best tool to transform public services. Committing £24 million to use AI to prevent fraud in the public sector, returning £100 million of revenue not lost to fraudsters, is great value and an important measure to ensure public confidence in government finances. But announcing more money to replace paper-based services in DWP (£17 million), and making Family Courts offer targeted online guidance and legal advice (£55 million) are both likely to have the public wondering why they haven’t happened already.

There’s plenty of interesting detail in the Treasury’s supporting document on other areas which didn’t make the cut in the Chancellor’s speech: including better procurement, major projects and asset management which is worth a read, but the biggest opportunities still feel like they’ve been left on the table.

Defence

In a world at war, you wouldn’t expect to see the Ministry of Defence’s budget shrinking in cash terms. But it appears to be that way — they are planning for £54.2 billion of day-to-day spending in 2023-24, falling to £51.7 billion in 2024-25. Given the plan that defence spending grow with the economy at our NATO commitment of 2% of GDP, the reduction looks like a tapering-off of additional military aid for Ukraine announced in the previous Budget. Yet while the Government remains committed to increasing the defence budget to 2.5% of GDP, only when “economic conditions allow” — which seems a little too vague given geopolitical risks.

It is also plausible that the Ukraine war will escalate later this year, depending on the outcome of the US Presidential election, and the Middle East remains volatile. And China’s premier this week announced a 7.2% increase in their military budget.

Maybe Defence could take a leaf out of the NHS’s book and develop a productivity plan of its own? Along with biting the bullet on the need for new capabilities and significant spending to build them.

SAY WHAT

Treasury orthodoxy

Critics of Treasury orthodoxy may be slightly bemused at the Chancellor’s announcement that in the next SR “the Treasury will do things differently… prioritising proposals that deliver annual savings within five years, equivalent to the total cost of the investment required”.

This doesn’t feature in the Budget document, but we can presume is a nod to the criticism that the Treasury only funds ‘spend to save’ investments which show savings within three years (the common period a Spending Review covers). A commitment to longer-term investments would be welcome, but the bar is set very high. “Annual savings… equivalent to the total cost of the investment required” would be ones with a very high Benefit-Cost Ratio (BCR) — high enough that the Treasury would likely fund it anyway. Measured over a ten-year period, the BCR on a project meeting that threshold would likely be at least 5:1. In comparison, the package of non-NHS investments in this SR achieves a BCR of just 2.25.