Lord Willetts is President of the Resolution Foundation. He is a former Minister for Universities and Science.
The Spring Statement debate rumbles on because it encapsulates so many important issues on which the Conservative Party has not yet made up its mind. These are vividly revealed because the problems facing Rishi Sunak are so acute – yet another once in a lifetime crisis, with the shocking rise in energy prices and wider inflation hitting living standards hard. Typical household incomes are projected to fall by four per cent in 2022-23 – the biggest hit to family budgets since the mid-1970s – as inflation far outpaces increases in pay and benefits.
I believe the Chancellor is right to be a fiscal conservative, bearing down on borrowing and debt. One of the most striking figures in his Statement last week is that Government borrowing falls from 14.8 per cent of GDP in 2020-21 to just 1.3 per cent in 2024-25. With the cost of debt surging – partly because of inflation-linked debt – it is right to get borrowing down.
Many Conservatives would prefer him to achieve this by cutting spending rather than raising taxes. But the underlying forces driving up public spending are very strong. Health spending has, and will continue to, increase faster than inflation. And demographics will continue to place pressures on public spending.
When there were lots of Boomers, that meant lots of workers. Now Boomers are getting older and that means more using the NHS and claiming pensions. The Tory reshaping of the State over the past decade has turned it into a state delivering health services and benefits mainly for old people – and there will be more of them. They also tend to vote Conservative, which means even cutting back on the triple lock is hard.
The tax burden is rising as a result. The Conservative Party does not like putting up taxes, but that should not inhibit the necessary debate on the best design of the tax system. Regardless of the exact total of tax, there are still important decisions about how to collect them.
A key choice is between rates and thresholds. How much should the Government be broadening the base – bringing more people into tax – and if it could afford to do so, then cutting rates? Or is it better to raise thresholds, even if rates remain high.
It may not be a happy precedent, but this was the argument which gave us the poll tax – Margaret Thatcher was worried that high spending councils could be elected by coalitions of voters who did not pay any local tax.
Does it matter if the income tax threshold is so high that only three quarters of households pay the tax? Whilst raising the threshold is usually described in the media as helping the less affluent, it actually helps all taxpayers, so it is an expensive way of helping the low paid.
If the Treasury then tries to recoup the money from the higher paid, it makes the system at the top more complex with higher marginal rates as tax allowances are withdrawn. The Chancellor probably believes that the threshold-raising strategy has gone too far, and his announcement of the future income tax cut may be signalling that he is rate cutter, even if the tax is then paid for by a broader base of tax-payers.
The big omission in the Budget was anything to help the less affluent half of the population. The obvious means of doing that is by some measure on benefits. There was a very illuminating comment from one Conservative MP: “helping the working poor saves Tory votes. Helping those purely on benefits doesn’t.”
This reflects the widespread belief that most families on benefits are not working. But that is no longer the case. We have a flexible jobs market with very high rates of employment, but wages are still quite low, so there is a big problem of the working poor and they receive benefits: 40 per cent of Universal Credit claimants are in work.
The Treasury in its tidy-minded way thinks that it has already tackled the Spring increase in the energy price cap. The next moment for decision will be the Autumn increase in the cap and they can tackle that later. The Chancellor might forward announce tax cuts, but he didn’t announce i advance what help might be available then.
However it looks as if he is planning to repeat the council tax rebate. But more than one-in-ten households in the bottom half of the income distribution will not be eligible for the council tax rebate to help with their bills. Instead, the Treasury could have brought forward next year’s increase in benefits, providing more substantial support to ease the living standards pressures on low-income households.
Behind all this is the problem of a poorly performing, low growth economy. This is the underlying reason why living standards stuck. By 2027, real wages are set to have grown by just £18 a week since the financial crisis, compared to £240 a week had they grown in line with the pre-financial crisis trend. In a low growth economy, tax cuts matter more, since they look like the only way to boost incomes.
The most effective way to tackle this shockingly poor performance in the long run is to raise the growth rate. Britain looks to be operating with a much lower rate of economic mobility than in the 1980s: lower rates of workers moving job – in particular lower rates moving sectors, lower rates of geographical mobility, and lower rates of company opening and closure between sectors.
In 2021, the reallocation of labour across 21 industry sectors, compared to a decade ago, was equivalent to seven per cent of total employment. This is a one-third as high a rate of reallocation as the 1980s peak when we were a much more mobile economy.
Margaret Thatcher had a strategy for boosting our economic performance. This was privatisation – but now many of those firms are heavily regulated and it is the regulatory state which needs reform. We had labour market reform.
Then that meant tackling the power of trade unions, but now the problem is weak incentives for workers to move on and retrain. And the Single Market exposed companies to increased competition in a bigger market driving them to boost performance. Now the openness of the economy is falling: latest figures show that UK export volumes fell 14 per cent between the three months to January and the same period pre-pandemic, compared to the average for advanced countries rising by five per cent.
Perhaps one reason for Treasury wariness of the levelling up agenda is that the White Paper about it includes a celebration of staying where you are. That is a key strand of conservatism. But it is not clear that it is the way to tackle the growth crisis, which is a mobility crisis – and the underlying cause of the cost of living crisis.