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What Economists Say About Key Spring Budget Announcements

Jeremy Hunt announces changes to taxes, childcare, and health related benefits in his budget on Wednesday. (Alamy)

7 min read

One of the UK's leading independent economic research units, the Institute for Fiscal Studies (IFS) has issued its verdict on key elements of Jeremy Hunt's Spring Budget: tax, childcare, and health related benefits.

Delivering his Budget in parliament, Hunt said the changes would "tackle the two biggest barriers that stop businesses growing: investment incentives and labour supply".

In a briefing on Thursday, the IFS explored three key areas the government made policy announcements on and provided analysis and critique. 

Here is what the IFS had to say about the most important elements of the Chancellor's Budget:

Changes To The Tax System

The Chancellor introduced a range of tax changes in the Budget on Wednesday, with cuts to tax on pensions gaining the most focus.

People will now be able to save an unlimited amount in their pension pots without incurring tax after the government abolished the £1.07m cap – with the yearly allowance rising from £40,000 to £60,000.

The government has said that the changes will act as an incentive to stop over 55s retiring, particularly doctors who have argued that working longer would cost them more in pensions tax in the long run. 

There has been widespread concern about shortages in the workforce, and rising economic inactivity among over 55s due to early retirement. 

But Paul Johnson, director at the IFS, doubted this change would have a significant impact on the issue it seeks to resolve. 

“One policy that probably won’t play a big part, if any, in increasing the number of people in work, is the increase in the pension tax annual and lifetime allowances,” he said. 

The IFS has also warned that, while people may stay in work longer now they are able to save more tax free, the rise to the yearly allowance may mean people may reach their own pension savings goals more quickly and therefore retire earlier than they would have before. 

The pensions changes also disproportionately benefit wealthy pensioners – with the IFS warning that it may be used as a vehicle to avoid inheritance tax as pension pots are not subject to it.

Other significant tax changes in the budget include the government’s decision to go ahead with the corporation tax rise from 19 per cent to 25 per cent next month – coupled with changes to capital allowances amid fears of a hit to investment.

Capital allowances allow businesses to write off the cost of certain capital spending against their taxable profits, therefore reducing their overall tax bill; the capital allowances confirmed in the budget amount to £27bn over the next two years. 

The main element, Full Expensing (FE), lets taxpayers deduct 100 per cent of the cost of certain plant and machinery from their profits before tax – effective from 1 April 2023 lasting until 31 March 2026.

The other element, the First Year Allowance (FYA) allows businesses to deduct 50 per cent of the costs of some manufacturing equipment from their profits during their year of purchase – including assets like solar panels and thermal insulation.

However, while the changes will save many businesses billions, the IFS has warned the short term length of the measures – lasting just three years, although the government has hinted they would like it to last longer – could damage business confidence when deciding whether to invest in the UK.

"Formally doing it temporarily, whilst claiming an ambition to make it permanent, only adds to the uncertainty in the system," said Johnson.

He added: "Government needs to learn that stability and consistent long-term strategy are vital for companies looking to invest and therefore for securing better living standards."

Reforms To Health Related Benefits

Personal Independence Payments (PIP) is money from the government to help disabled people with extra living costs regardless of whether they work or how much they earn. 

For those people unable to work because of ill health, a work capability assessment is currently necessary to access support through Universal Credit.

However, new plans put forward by the government would remove the work capability assessment to make a judgement on whether someone is able to work - instead making the health part of Universal Credit dependent upon whether a person qualifies for PIP. 

The government believe it may strengthen work incentives, enable more tailored support, and reduce administrative and cost burdens by having just one health assessment for PIP and health related Universal Credit rather than two separate ones. 

However, experts are concerned the arrangement could leave many people worse off - particularly those on Universal Credit but not claiming PIP.

"About a million people on UC [Universal Credit] are deemed to have work-limiting health conditions but are not on PIP," said Johnson.

"Under these proposals 600,000 of them could end up losing £350 a month, and 60% of these have mental health problems.

"To avoid that, the government could widen eligibility criteria for PIP. But remember that PIP is also available, irrespective of income or work status, to far more than those now on UC.

"So the potential for yet further upwards pressure on disability benefits spending would be considerable."

Other issues with the delivery of the scheme includes PIP waiting list being extremely long – with the current wait around 26 weeks; the number of claims for PIP are also soaring as economic inactivity due to long-term sickness continues to rise in the UK. 

"It is the non-means-tested disability benefit [PIP] caseloads that have been on a rapid and long-term upward trajectory," said Johnson. 

"Even more benefit spending decisions are now to be loaded on that part of the system.

"In sum, very careful design is needed to avoid either runaway spending or hitting low income sick benefit recipients, or potentially both."

Changes To Childcare

The government’s changes to childcare will allow working parents in England to access 30 hours free childcare per week for 38 weeks of the year from when their child turns 9 months old to when they start school.

“If this budget is remembered for anything, and it should be remembered for this, it will be for the extension of free childcare to working families with children under three," said Johnson.

"This is a major expansion of the welfare state."

However, the scheme will not start to be rolled out until April 2024 - and will only be fully available to all ages from September 2025.

The IFS has also pointed out that potential issues with the government’s policy include the fact only households where both parents are working will be eligible for the support - with no support for people in education, training, or looking for work.

The requirement to already have a job could also pose challenges, with families having to apply four to 10 weeks before a term starts for the help – creating a delay before the financial support arrives where households would have to pay themselves. 

The IFS said this “sits oddly” with reforms to Universal Credit childcare support the government announced, when they removed the five week delay between claiming the help and receiving it; however, they warn it could risk an increase in over-payments or fraud if it is claimed in advance.

Those receiving the shortest end of the straw on childcare are households where one parent earns £100,000 or more – because that will place it outside the limit of eligibility for the support.

While the IFS say the number of people affected will be small, it estimates a parent with two children under the age of three using 40 hours of childcare would be better off earning £99,000 than £134,000 to stay within the threshold to qualify for the new free childcare.

The IFS say this could lead to parents refusing pay rises or looking at whether they are able to save more money by looking at their pension contributions.

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