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Don’t be fooled by childcare pledges, Hunt’s budget offers the bare minimum

OPINION: The chancellor failed to tackle the cost of living crisis, but threw money at big business and top earners

James Meadway
15 March 2023, 6.37pm

Hunt’s budget lacked real action on the cost of living crisis


Dan Kitwood/Getty Images

Jeremy Hunt’s first Budget was a mixed bag: bad news presented as good, traditional Conservative giveaways to the wealthy, and one rather lonely genuinely good new policy.

The government needed to step up and address our multiple worsening crises – the cost of living, the climate, and public sector services. Instead, Hunt did the bare minimum.

The chancellor began by trumpeting the Office for Budget Responsibility’s (OBR) new forecast that Britain will avoid a “technical recession” this year, with the economy shrinking by just 0.2% overall. Rejoice, just rejoice.

It is peculiar that so much of our discussion around the economy now hinges on some notoriously unstable figures. More usually, the OBR has been too optimistic in its divinations, and that optimism was certainly on display today. Its suggestion that inflation will fall dramatically to 2.9% by the end of the year, far lower than the Bank of England is forecasting, is likely to prove well out of line as another turbulent year of supply difficulties, worsening agricultural yields and geopolitical instability rolls on.

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But otherwise, and despite Hunt’s trumpeting, the OBR predicts nothing good: a recession may now be avoided this year and next, but it reckons growth every year after will be worse than it previously thought. And most seriously of all, it thinks real living standards will still be below their 2008 levels by 2028, a full two decades after the financial crisis.

Elsewhere, Hunt followed through on Johnson-era Corporation Tax rises but sweetened the deal for Britain’s poor business giants with a generous new “full expensing” policy, worth £27bn over the next three years.

In principle, a higher headline rate for corporate tax, combined with a more sophisticated regime of reliefs that steer and encourage investment in critical industries and sectors would be an improvement on George Osborne’s policy of a low headline tax rate but limited reliefs.

But this new regime does not seem to offer that level of sophistication, acting as a blanket allowance for corporations to claim money back on their investments. And, presumably to try and fit inside the government’s own rather daft target for debt and deficit reduction, the new allowances will run for only three years – not long enough to have any impact on long-term investment, according to the OBR. It’s an expensive bung to major companies for no real gains, other than a chance of stoking up a small pre-election investment boom.

It has been suggested that providing the childcare the government has promised would cost more funding than Hunt announced

In a similar vein, Hunt removed the Lifetime Allowance on pensions tax relief – handing the top 1% of earners a large giveaway in an attempt to induce them to work a few more years. Meanwhile, he tightened the sanctions regime for those on benefits, despite near-zero evidence it has any of the claimed effects on labour market participation. Offering tax reliefs for the wealthiest and sanctions for the poorest has a very old-school Tory ring to it.

Out of Conservative character, though, was the multi-billion-pound extension of free childcare to cover infants over the age of nine months in England. But lurking behind all three moves – pensions tax reliefs, benefits sanctions, and childcare – is the government’s growing desperation to cut the rising numbers of people moving into “economic inactivity” since the pandemic.

The promise of more free childcare will be a welcome relief for parents currently facing among the highest costs in the world. Such expenses – which run to many thousands of pounds a year – have a direct impact on women, with one recent estimate suggesting their loss in earnings totals £9.4bn a year. Lower labour market participation is usually considered a substantial drag on economic growth, and the same estimate suggested the loss to the whole economy from expensive childcare came to £38bn a year, about 1% of GDP.

It was reportedly these economic calculations that finally swayed Rishi Sunak to give the go-ahead for a significant new item of government expenditure. No doubt the chance to close down a Labour attack line well ahead of the general election was a bonus. Indeed, Labour will now be forced to revise and improve its offer on childcare. This is no bad thing – Hunt’s additional spending, while welcome in the short-term, is being made into a childcare system that still lacks the funding needed to bring it up to the standard common across northern Europe.

The Institute of Public Policy Research estimates that the provision of a “universal childcare guarantee” for children up to age 11, providing free or affordable comprehensive care, would boost parents’ wages by around £13bn a year, for a net cost to government (allowing for extra taxes generated from higher pay) of around £8bn. What was offered today pales in comparison, and The Women’s Budget Group has suggested that providing what the government has promised would cost more funding than Hunt announced. Childcare, like care work in general, remains poorly paid and insecure, and provision worryingly patchy, with nurseries forced to close across the country – particularly in poorer areas.

Hunt offered barely a peep about corporations’ extraordinarily large profits and worsening wealth inequality

But most striking about this budget was what Hunt chose not to mention. The word ‘pay’ barely passed his lips in a lengthy speech – despite tens of thousands of public sector workers outside, and millions on strike across the country today and over the past six months.

An inflation-matching pay rise of 10% across the public sector would cost roughly £18bn on top of offers already made, easily inside the £30bn that the Office for National Statistics says public finances have improved by since November. Yet the government has refused to make a serious offer to most of its own essential workers, condemning millions to more real-term pay cuts over the next year – on top of those of the past decade – as inflation remains way above wages.

Many will decide they simply can’t afford to carry on working in the public sector, fiddling around with the pensions tax relief will do nothing about the shortages of nurses or teachers. The longer the government fails to address the recruitment crisis, the more the public sector’s failures will mount as the staff shortages worsen.

The reasoning the government has offered, via leaks from the Treasury to the Financial Times, for failing to address a glaring problem is that it believes an offer over 5% to the public sector may spark copycat claims from private sector workers. That the solution to a cost-of-living crisis is to try and hold down wages is perverse logic, but that’s where this government and much conventional economic thinking finds itself.

In reality, with profits of energy giants and other large firms soaring amid exceptionally high prices, the case for substantial, widespread pay rises is a demand for redistribution: to whittle away those fat profits so paychecks become a little less paltry.

Hunt, of course, offered barely a peep about the extraordinarily large profits and worsening wealth inequality that the pandemic and the war in Ukraine have generated. Simple tax fixes, like equalising the rates paid on capital gains with the rates paid on income from work (estimated to bring in around £15bn) have been left untouched.

The chancellor has given the general impression of a government treading water as it waits for a more opportune moment to make some pre-election tax cuts. Yet Keir Starmer’s failure to condemn its lack of action on pay and the cost-of-living crisis has allowed the government to present itself as genuinely tackling both.

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