Snap Analysis 15 March, 2023

Reform analysis: Spring Budget 2023

Setting aside the truly terrible (attempts at) jokes, Jeremy Hunt made a fair fist of his first Budget as Chancellor. He was able to point to a stronger economic performance than previously predicted – no technical recession, private sector output above pre-pandemic levels, and lower borrowing – and a set of OBR growth forecasts rather more positive than those of the Bank of England (presumably because they are scoring the new measures announced today). Of course avoiding a technical recession and averaging around 2% growth over the next five years isn’t much to write home about.

Nor would we have been so chipper about driving underlying public sector debt down to *checks notes* 94.6% of GDP by 2027-28. There were laughs all round at Reform HQ when the Chancellor declared that “with a buffer of £6.5 billion, it means we are meeting our fiscal rule to have debt falling as a percentage of GDP by the fifth year of the forecast”. That’s essentially the equivalent of saying we have no buffer… and indeed according to the OBR that £6.5 billion has already disappeared as a result of interest rate changes since their forecasts were locked! So no buffer then; or at least it proves that, given geopolitical volatility, a much more substantial buffer would be needed (see more on the flabby fiscal rules below).

Unusually, there were no rabbits – unless you class the abolition of the pension lifetime allowance as a rabbit (having been trailed as increasing to £1.8 million – see below for our take). But there was a lot to welcome: investment in childcare, welfare reform, boosts to science and tech, and more devo. There’s also a (brief) section in the red book on “working more efficiently”, which is a subject close to our hearts.

On the downside, the pension reforms represent a massive giveaway to the wealthy (again, see more below), and continuing cuts to the cost of fuel and beer, while part of the cost of living measures, run contrary to achieving two of the biggest government objectives: Net Zero and a healthier population. What didn’t we get? The promised NHS workforce plan (hard to see how that won’t blow a hole in the finances when we get it), anything on social care (yes, I know, broken record) or public sector pay settlements (another likely hole).

For more detail, and the team’s usual Good, Bad, M.I.A. and Jury’s Out analysis, read on. Oh, and check out our ‘in the small print’ for those hidden gems…

👍 GOOD FOR

Disability benefit reform

Alongside the Budget, the Department for Work and Pensions published the long-awaited white paper follow-up to the July 2021 green paper on disability benefits and support. ‘Transforming Support: The Health and Disability White Paper’ is as radical as anything contained in the red book, and picks up where the welfare revolution of a decade ago left off. There’s lots of good stuff in there about improving the experience of disabled people interacting with the DWP, but the main event is the abolition of the much hated Work Capability Assessment (WCA).

The WCA, originally designed and introduced by New Labour and largely implemented by the Coalition, is the gateway to the additional out-of-work benefit payment received by people with a disability or health condition. In other words, you have to prove you can’t work in order to get that extra money, which makes trying work a big risk. Instead, the Government is proposing to replace the current payment with a ‘health element’ in Universal Credit, payable to those in receipt of both UC and the extra costs benefit Personal Independence Payment (PIP). Reform proposed this approach in a detailed 2016 paper.

This incentivises people to try moving into employment by removing the risk of being worse off if that job doesn't work out. Two big questions which the Department will have to work through: how will conditionality be applied (the WCA also determined this), and who, in the future, won't get the additional support as they are ineligible for PIP and what extra back to work support can they expect?

Childcare

This was one of the biggest, and most widely welcomed, of the Budget commitments: a massive expansion of free childcare. By September 2025, working parents will have access to 30 hours of free childcare a week (for 38 weeks of the year) until their children are school age. The pressure group ‘Pregnant then Screwed’ reckon 17% of parents leave work due to childcare costs, implying that affordable provision is key to keeping them in work.

Since providers already struggle providing existing free spaces, with parents picking up extra costs, the Government’s investment to lift the hourly funding rate providers receive is vital. Debates will inevitably continue to rage about changes to the staff to child ratio (other countries allow more children to be looked after per staff member), but this is clearly one way to help alleviate the workforce shortage — though possibly not enough to compensate for the extra demand the policy will generate (for example see this from the Women’s Budget Group).

Immediate relief for low-income families will come from the Government paying upfront, rather than in arrears, for childcare costs in Universal Credit.

A new wraparound pathfinder scheme will be trialled to help parents of school-aged children, with the Treasury scoring £345 million of spending over 3 years. However, the funding disappears after 2025-26. If this is to move from pathfinder to business-as-usual then long term funding for schools is needed.

The OBR thinks the free childcare and UC childcare changes will mean 75,000 more people in employment by the end of the forecast period.

Science and Tech

Science and tech, a PM priority, featured heavily in the Budget. The £900 million to develop an exascale supercomputer (taken from 'The Future of Compute' review) is essential to keep pace with Europe — last year, Germany was selected to host exascale computer JUPITER, with mid-sized versions in four EU states. There’s also a new 'National Quantum Strategy', with funding worth £2.5 billion over 10 years and some pretty ambitious targets: attracting 15% of global private equity investment and a 15% worldwide market share by 2033, against 12% and 9% now. New research hubs seem to be the main mechanism for achieving this, hopefully by developing existing regional centres of excellence.

Turning to life sciences, the Budget focused on the role of medicines regulator the MHRA. As Reform argued last year, the rapid development of the COVID-19 vaccine partly reflected the MHRA’s more efficient rolling review process. And putting it on a healthier financial footing would “enable it to return to more flexible pandemic-era regulatory practices.” Fortunately, the Chancellor was listening! The extra £10 million for the regulator is very welcome, but the new regulatory mechanisms — faster approval processes for UK-based innovations and “rapid, often near-automatic sign-off” for medicines green-lit by trusted global regulators — are the real prizes.

A couple of other measures — additional tax relief for R&D intensive SMEs (welcomed by Dame Kate Bingham as a benefit for life science start-ups) and extending the British Patient Capital programme for a further decade — provide further evidence of the Government’s commitment to this agenda. Together, these are exactly the steps needed to secure our place as a science and tech superpower.

Devolution

The Chancellor finally announced the agreement of further ‘trailblazer’ devolution deals with the Greater Manchester and West Midlands Combined Authorities. Andy Burnham and Andy Street will receive more control over skills, transport, employment, housing, and Net Zero policymaking in their respective patches, bringing them closer to the scale of devolution enjoyed by the Mayor of London. Importantly, the two Andys can also look forward to department-style multi-year, single funding settlements in the next spending review, and the deals feature a long-term commitment to allowing local authorities to retain 100% of their business rates: not full fiscal devolution, but certainly a boost to local autonomy. This is a landmark step toward a more decentralised governing model across England. The Budget also makes clear that ambition remains to roll out similar new deals for all combined authority mayors over time.

With all these new powers will come demand for new forms of accountability, beyond the direct electoral connections of Mayors themselves: the published devolution deal for Greater Manchester promises just such “an enhanced package of accountability and local scrutiny measures”. We are also intrigued to find out whether combined authorities will in practice promote ‘double devo’, sharing their powers and resources down to more localised scales to solve problems.

Investment Zones

The flagship Truss-era policy of Investment Zones is back. Each zone will involve a partnership between local government and a research institution, and will need to be designed to attract investment to places which have previously “underperformed economically”. The offer is for each zone to receive £80 million of funding over five years, flexibly split between new spending and tax incentives to help drive private sector activity. Eight mayoral combined authorities are to lead on submitting plans in England (so no repeat of the millions wasted by local authorities when they prepared 626 doomed bids into the original Investment Zones scheme).

The evidence for the effectiveness of lower tax, lower regulation zoning for economic growth is mixed. The OBR concluded in 2021 that in practice such measures are not as likely to create additional economic activity as they are to refocus it from one part of the country to another. Yet we at Reform *tentatively* welcome these plans: these are the kinds of experiments that will be needed to make levelling up real. If Investment Zones can be as carefully targeted as today’s ‘Policy Offer’ prospectus document proposes, genuinely locally-led, and designed to promote powerful partnerships, they could yet help to bring about a more geographically balanced economy.

👎 BAD FOR

Pensions

Under the guise of retaining senior NHS doctors the Chancellor announced major reforms to pension tax allowances. The Annual Allowance will be raised from £40,000 to £60,000 and the Lifetime Allowance of £1.07 million will be abolished altogether.

In the last year for which we have data (2020-21), 8,500 people exceeded the Lifetime Allowance, and 41,000 people saved more than £40,000. True, the number affected will grow over time, but these changes will benefit just a tiny proportion of the (top-earning) workforce. The taxpayer cost of helping this small group out is £1 billion annually by 2027.

The Treasury is justifying the move as part of its strategy to tackle economic inactivity, estimating that the changes could boost employment by around 15,000 in 2027-28, but if you’re able to save more than the median annual salary into your pension pot each year, there’s a good chance you’re enjoying your early retirement. Oh, and HMT itself acknowledges that the behavioural assumptions make this 15k figure uncertain.

There likely is a case for a small uplift to the yearly and lifetime allowances, and there clearly is an issue with NHS consultants. But, as Paul Johnson of the IFS has pointed out, this feels like using a “sledgehammer to crack a nut”. Given demands for spending restraint — and the degree to which so many are currently struggling — this is a poor decision. It’s also worth noting that NHS consultants, among the top 1% of earners in the country, are in this position because of the extremely generous, taxpayer-funded pensions they receive.

Fiscal rules

The Chancellor was pleased to announce that his budget *technically* doesn’t breach any of the Government’s (self-imposed) fiscal rules. Putting aside the debate about how tight our fiscal targets are, or the merits of rule setting that encourages creative accountancy, the small print here is important.

The Government’s target is to have debt as a percentage of GDP falling by the fifth year of the OBR’s forecast (2027-28), and according to the projections they achieve this… just. The debt-to-GDP ratio will rise year-on-year until 2026-27, before dropping by 0.2% in 2027-28. Again, as we've noted above, that's a wafer-thin margin. And given the volatility of the forecasts it's not clear this fiscal rule will actually be met.

Mixed messages

Heavily trailed, and now an annual event, the Chancellor announced yet another freeze to fuel duty, plus the retention of the 5p cut. At almost £5 billion, this is around five times the cost of the 12 new Investment Zones combined. We are told this will be kept under review in the long term, with careful consideration of “fiscal implications”. Given the tight fiscal context right now, we won’t hold our breath on a future increase.

At the same time, there were very welcome commitments to support green technologies, including “up to £20 billion funding” for the early deployment of Carbon Capture, Usage and Storage, and to address constraints to expanding nuclear energy supply. But creating incentives to pump more fuel from the gas station, while spending large sums to mitigate the effects of climate change, all feels a little like policy working cross-purposes…

Likewise, whilst pubs are important community assets that have felt the increase in the cost of energy more than most — and there’s a decent argument for offering them targeted support — the increase to Draught Relief for pints (from 5% to 9.2%) risks sending the wrong message on public health.

⚖️ JURY'S OUT

Replacing Local Enterprise Partnerships

Local Enterprise Partnerships (LEPs) — voluntary partnerships between local government and businesses which replaced Regional Development Agencies to promote local economic growth in 2011 — may now themselves be on the way out. The Government is “minded” to withdraw support for LEPs from April 2024, and will be consulting about repositioning “democratically elected local leaders” to lead on such matters in future. A final announcement is promised this summer.

For us, the jury will be out until we learn about the detail: LEPs have been a mixed bag, but their coordinating function and ability to involve the local private sector will have to be sustained by any new approach. It’s also important that this function is organised at a scale that makes sense in terms of regional economic geographies (which might be difficult to do if this responsibility falls directly to lower-tier local authorities, for example).

❓Missing in action

Adult social care

"Here’s our regular reminder that social care needs sorting. Yes, we know you know. Again, a fiscal event passes without mention of social care. Actually, that’s unfair, the words ‘social care’ do appear five times in the red book… as part of the name of the Department of Health and Social Care.”

Copy and pasted from our Spring Budget analysis in 2021. There’s been progress since then, “social care” now appears eight times in the Red Book (yet again due to the Department’s name).

🤔 Hidden in the small print

Building on the 5% efficiency targets set out in the 2021 Spending Review, Reform was delighted to see a commitment to develop a new “Efficiency Framework”, aimed at improving the way departments report efficiency savings and ensuring “appropriate oversight”. While these reporting mechanisms are no doubt important, giving Treasury and Cabinet Office a more accurate picture of how savings are being made, they will not by themselves unlock efficiencies. Doing this will take more significant reforms to the machinery of government — including the incentives departments and civil servants operate under, and the capabilities and cultures that exist in Whitehall and beyond to achieve these efficiencies.

Also in the small print, the OBR’s ‘Economic and Fiscal Outlook’ includes changes that have taken place since the close of its medium-term forecast, on which the Chancellor’s claim to be meeting his fiscal rule of “debt falling as a percentage of GDP by 2027-28” is premised. Notably, expectations of the Bank Rate (which directly affects the cost of government borrowing) have increased by 0.6 percentage points to 9 March, in turn raising borrowing costs by £6.5 billion. In other words, as we point out above, enough to completely eliminate that “buffer of £6.5 billion” cited in the Chancellor’s speech. Which was already, as the OBR says, the “smallest amount any Chancellor has set aside” against their fiscal target (with ‘headroom’ averaging £25.6 billion since 2010).

Perhaps most interesting given some of the bold measures in the Budget aimed at increasing labour supply, the OBR projects that labour market participation will remain unchanged (at 63%) in 2027-28, compared to its 2022 forecast. This is explained by a more pessimistic judgement of recent drops in participation, which the OBR now considers “structural rather than cyclical” — offsetting the boost in participation facilitated by the new policies. A back to work budget, costing a cool £26 billion over five years, just to arrive back to where we started.