Treasury Committee
Oral evidence: Budget 2023, HC 1217
Tuesday 21 March 2023
Ordered by the House of Commons to be published on 21 March 2023.
Members present: Harriett Baldwin (Chair); Anthony Browne; Douglas Chapman; Dame Angela Eagle; Emma Hardy; Danny Kruger; Dame Andrea Leadsom; Anne Marie Morris.
Questions 1-81
Witnesses
I: Torsten Bell, Chief Executive, Resolution Foundation; Paul Johnson, Director, Institute for Fiscal Studies; Professor Diane Coyle, Professor of Public Policy and Co-director, Bennett Institute for Public Policy, University of Cambridge; and Tony Wilson, Director, Institute for Employment Studies.
Witnesses: Torsten Bell, Paul Johnson, Professor Diane Coyle and Tony Wilson.
Chair: Good morning, everybody. Welcome to this Treasury Committee session, covering economists’ views on the Chancellor’s Budget of last week. Will you introduce yourselves, starting on the left with Torsten?
Torsten Bell: My name is Torsten Bell. I am the chief executive of the Resolution Foundation.
Tony Wilson: I am Tony Wilson, the director of the Institute for Employment Studies.
Professor Coyle: I am Diane Coyle, co-director of the Bennett Institute at the University of Cambridge and Productivity Institute researcher.
Paul Johnson: I am Paul Johnson, director at the Institute for Fiscal Studies.
Q1 Chair: Paul, going into the Budget process the Chancellor found himself in the fortunate position of having a better fiscal outturn than when he went to the Dispatch Box in November. Can you quantify for the Committee what that outturn had been, how much it was worth and therefore how much he had to work with as he prepared his Budget?
Paul Johnson: Over the coming year, borrowing is in the order of £30 billion-odd better than expected in November, but—remember—still a great deal worse than expected last March. Then there was an improvement relative to November over most of the forecast period. Debt as a fraction of national income was forecast to be a couple of per cent. less over the forecast period than was forecast in November. Broadly speaking, the Chancellor used about two thirds of that additional room relative to November.
Interestingly, it is worth comparing March with November when the forecast got worse, and he simply let them get worse, but compare November to this March, when they got better, he used up a large fraction of the additional space that, in a sense, came with that. He left himself very tight against his debt falling in the fifth year of the forecast period—even tighter than he was in November—but it is falling from a slightly lower level than was forecast in November, which is an illustration of the slight oddity of that particular fiscal rule. It is tighter against it, but debt is actually now forecast to be a bit lower than it was to be back in November.
Q2 Chair: So there was the £30 billion that came effectively from the fact that the economy had been a bit better than expected since November and energy prices had been a bit lower. Then there was additional money that he had to work with, given that the OBR revised up some of its forecasts. Can you break that down as well?
Paul Johnson: If you look right across the period, the biggest benefit comes from the fact that the economy appears to have been a little bit more tax-rich over the last few months than the OBR expected. It is expecting it to remain more tax-rich for a given amount of growth. Actually, the OBR is expecting the economy to be only a small amount bigger at the end of the period than it was expecting back in November. So they have some benefit from that, but the bigger benefit—or at least as big a benefit—comes over the longer term from the fact that it looks like we are getting more tax per unit output than it expects.
Q3 Chair: Can you put a figure on that in billions for us?
Paul Johnson: I probably could but I don’t have it to hand, I’m afraid.
Q4 Chair: Okay, but it is £30 billion since November?
Paul Johnson: In the coming year, yes.
Q5 Chair: Does anyone else want to have a stab at what the improved outlook—in terms of the OBR numbers—gave the Chancellor to work with?
Torsten Bell: Do you mean total improvement—extra borrowing over the whole period?
Q6 Chair: Yes.
Torsten Bell: It is £150 billion accumulatively by 2027-28.
Q7 Chair: And that includes the £30 billion since November?
Torsten Bell: Yes, it does, but he also spent two thirds, as Paul said, of the future years of it. I think it is really important not to forget the big picture, which is that the level of debt is still 15% of GDP higher than it was expected to be back in March 2022. There is some good news, but the good news means things are better but still pretty grim compared with where we hoped they were before an energy shock turned up.
Q8 Chair: But you price the total improvement from the OBR and the outturn as being about £150 billion over five years?
Torsten Bell: Yes, and that is substantial. It is not the biggest improvement you have ever seen, but it is a very substantial upgrade.
Chair: It is better than going the other way.
Torsten Bell: It is definitely better than going the other way, which is what we did in the autumn, but we should not lose sight of the big picture. What matters is that the country has faced a big energy shock and has used the public balance sheet to shield households and firms from a large chunk of that. We have chosen to become poor as taxpayers rather than as energy bill payers over the course of this year and next year. The net effect of that is higher public debt as a result. It is just not as bad as we expected it to be.
Q9 Chair: Do Tony or Diane want to question any of those medium-term macro assumptions? No? Then I want to probe further. Given that the Chancellor had more money to work with, he still ended up with this very narrow margin in terms of the five-year numbers. Just to make sure we are understanding this correctly, almost all of that improvement in the public finances has been used to pay for some of the measures in the Budget that cost money. Is that correct, Paul?
Paul Johnson: Roughly two thirds has been used to cut taxes and increase spending. In the final year, there is rather less loosening, because in that final year is when his fiscal rule bites. As I said, while the fiscal rule is met by an even slimmer margin than it was in November, it is from a slightly lower level of debt than was expected in November. The big picture is that it is quite difficult to meet the fiscal rule now when you have a combination of a very high level of debt to start with, very poor growth, quite high interest payments and some other bits and pieces like student loans coming on to debt. When all that is put together, actually meeting the target is quite hard. I would not like to project, because in November that target will roll forward another year, and there will be quite a lot of moving parts in determining whether it becomes significantly easier or not to meet.
Q10 Chair: And also forecasting out five years is—
Paul Johnson: Hugely uncertain.
Q11 Chair: You are the experts, and none of you would say that this is exactly what the outturn is going to be, would you?
Torsten Bell: No, we are not engaged in a forecast with certainty about what is going to happen in five years’ time. We are just doing our best to provide a basis on which to take prudent public finance decisions. Those forecasts still allow us to see, as Paul is outlining, that some of the structural changes make it harder to see debt falling in the medium term. They are still useful even if they are not point estimates of exactly what is going to happen.
Q12 Chair: We have the Office for Budget Responsibility coming in later this week, and we will obviously probe them on some of the assumptions. I want to move on to the fuel duty fiction that our Committee has highlighted. We didn’t expect that the Chancellor would be able to put up a 5p temporary rate at this Budget, and we didn’t expect him to be able to move back to the link to RPI, in terms of the fuel duty escalator. Sure enough, it didn’t happen, yet he has now replaced those numbers for next year, when my expectation is that it will be even less likely, given that it is an election year. It is basically a fiction that we are going to get this revenue from fuel duty, and yet the OBR continues to allow the Chancellor to put that in, although I note now that they have highlighted it in an extra line in their report. What is your view on this, Paul?
Paul Johnson: I agree with you entirely: it is a fiction.
Q13 Chair: Are there any other fictions in the projections?
Paul Johnson: Are there any other fictions in the projections? There may be, but I can’t immediately think of anything quite as egregious as that.
Q14 Chair: What about this three-year cliff edge, in terms of investment allowances?
Paul Johnson: Well, indeed. That is one of the oddities of the way the Chancellor announced the full expensing. He said he wanted it to be permanent but he could afford to do it for only three years at present.
Q15 Chair: Do we know that he wanted it to be permanent?
Paul Johnson: Well, he said he did. He actually said that he would like it to be permanent.
Chair: Right, okay.
Paul Johnson: It is quite damaging. Full expensing, given our current structure, is probably marginally the right thing to do, but full expensing possibly for three years—we don’t quite know for how long—just adds a degree of uncertainty to the system. I would imagine that firms will sort of assume that he will do what he said and that it will go on for more than three years, in which case, as you say, there is a degree of fiction in there. It would have been much better if he had simply said, “This is the policy, and it will continue indefinitely.” What he has got is costing him a significant amount three years out, and actually raising him money five years out, because the expectation is that investment gets brought forward and there will be less investment in the fifth year. A much more sensible policy would have been to announce it as a permanent change.
Q16 Chair: Is this a case of the fiscal rules driving the policy numbers?
Paul Johnson: Yes, it looks very much like that.
Q17 Chair: Diane, you are nodding and agreeing with that.
Professor Coyle: I completely agree about this. Adding uncertainty to what is probably a good policy measure seems quite unnecessary.
Q18 Chair: So your recommendation would be that, in terms of business behaviour, it would be better to have it on a permanently announced basis.
Professor Coyle: Yes. I have counted up, and we have had at least 18 changes in capital allowances since 1984, so every other year some aspect of the system has changed. It is not good for planning when businesses are being asked to make very long-term investments.
Q19 Chair: So you think it is a good policy, but you want it to be on a permanent footing, and not be subject to all these changes?
Professor Coyle: That’s right.
Q20 Chair: Anyone else want to comment on the fictions?
Torsten Bell: I agree entirely with Diane and Paul, which is unhelpful in the interests of debate. On fiscal fictions, there is more than one kind of fiction. We are focusing on the fiction that the forecasts include tax revenues that we don’t think will turn up, either because the Treasury are not going to go ahead with an RPI uprating of fuel duty next year or because they will have to maintain some level of higher capital allowances after the three years. But there is another kind of fiscal fiction, which is saying you are going to do something that will cost money but isn’t in the forecasts. An obvious example is saying you would like to continue it permanently, and allowing businesses to hear that, but not having that as the basis for your public finance planning. Another example would be the promise to get to 2.5% of GDP spent on defence—that is a really significant rise and there would be much deeper cuts to other Departments, if that was going to be delivered within the current spending envelopes set out.
Another one would be the Prime Minister and the Chancellor saying that they would just like to cut taxes in general—it is not clear which ones, but that they would generally like to cut taxes in the years ahead. That is a fiscal fiction.
We shouldn’t be po-faced about it; these aren’t that abnormal. On some of this, you had previous Governments over the last 10 years saying, “Our ambition is to raise the personal allowance and to cut income taxes over the course of a number of Budgets.” Those weren’t priced into the public finance forecasts immediately before or immediately after general elections. But I think it is the quantity of them that is the issue.
There are always some fiscal fictions around. I think there is a point at which you start stepping back and saying there are a lot of them at once, and that makes you worry—particularly when you have very tight margins against fiscal rules—that you will end up taking decisions to maintain the balance of those fiscal fictions and the fiscal rules, rather than taking the best decisions.
Q21 Chair: But is it fair to say that the market reaction to this Budget, in terms of the gilt market, has been considerably more reassurance in the market than back in September with the mini-Budget?
Professor Coyle indicated assent.
Torsten Bell: That is what you would call a low bar.
Chair: Yes. Right. Angela.
Q22 Dame Angela Eagle: I was just thinking how low that bar was.
I want to ask about growth. Torsten, why do you think the UK among the G7 is the only advanced country that has not yet regained its pre-pandemic size?
Torsten Bell: First, I wouldn’t place too much focus on individual years’ growth rates. I hear people saying, “The UK is forecast to have the worst growth this year”, and other people saying, “We had the best growth last year.” That isn’t the underlying issue, because countries bounce around year to year. The underlying issue is that we’ve seen slower growth for 15 years and that some of the drivers of that low growth might persist. I think that is what we should be focusing on.
If you are talking about this Parliament particularly, the OBR forecasts are for weak growth—the weakest growth that we have seen since the first term of the Thatcher Administration. It is very significantly not what we would like to see.
The drivers of it, in so far as they are clear, and these are contested, are, in the short term, that we have seen weak business investment since 2016—by weak, no growth in the immediate post-2016 phase, and flatlining growth in investment levels—then, like everybody, there were big falls in investment during the pandemic, and then a slow recovery from that, and then we are a country facing a bigger terms of trade shock from high gas prices than most other advanced economies. That is obviously true versus the United States, which is a net energy exporter. We are an energy importer.
Even within Europe, where most people are being hit by a terms of trade shock, the impact on us is bigger because we use more gas than most other countries. That’s because we use it to heat our homes directly, but we also generate a lot more of our electricity from gas than most other European countries do. We are being hit by bigger headwinds, on top of pre-pandemic traumas.
I would highlight in particular low business investment, and a general lack of clarity about what we are even trying to achieve as a country—a bit of embarrassment about the fact that we are a service-exporting-heavy economy, but we would rather be a manufacturing economy; a bit of embarrassment about the fact that we are a financial service-heavy economy. It is not as heavy as I think everybody assumes, but heavy. And obviously, we just had a large financial crisis, so that turns out to be less good at driving growth in the decade after the crisis than in previous phases.
Then we have even longer-term drivers of low growth, which include some of the things Diane has rightly highlighted over the years, about very poor productivity growth rates in many of our bigger cities outside of London.
You have a mixture of really short-term things—we use a lot of gas—and medium-term problems such as Brexit, the financial crisis, which is particularly bad for the UK economy; and then you have got even longer-term trends, in particular on economic geography.
Q23 Dame Angela Eagle: This was billed as a Budget for growth. What were the biggest pro-growth measures that you saw in it, Paul?
Paul Johnson: Potentially, the capital allowances—the expensing policy—but it would have been much more pro-growth, as we were just discussing, if it had been long term. Because it might be short term, it might bring a bit more investment forward but it also clearly just creates additional uncertainty. It is very hard to quantify, but given that we were going into a world with a 25% corporation tax rate and no policy on expensing, the alternative—not having done that—would have had a potentially damaging effect on growth.
If you look at the OBR numbers, the measures that they thought would have the biggest effect on employment, which clearly would help growth, were the childcare measures, although there is obviously a lot of uncertainty about how much effect those will have. That ought to bring a few tens of thousands of largely mothers of younger children into the labour force, and some additional hours for some of those in it.
Then there are smaller but potentially impactful changes to the rules around employment and support allowance and universal credit for those with disabilities. It is very uncertain at the moment how that will work. That could have a bit of an impact in the longer term.
I think all those things could have some effect. Within one Budget and with the sort of money available, you are never going to get dramatic effects, but building on that, you could have positive effects for growth into the medium run. Overall, those are the key things, which will have an initially marginal but potentially growing effect over time.
Q24 Dame Angela Eagle: Professor Coyle, do you think that the lack of an industrial strategy, or at least chopping and changing the industrial strategy, has meant that the country does not really have a sense of direction about how it is going to remake prosperity under quite different conditions now we are out of the EU? We had an industrial strategy from 2017 with five foundations, 12 sector deals and four grand challenges; then we went on to having three core pillars; then we had the catastrophic mini-Budget for growth, which actually achieved the opposite, in quite dramatic terms; and now we have four Es—enterprise, education, employment and the rather bizarre “everywhere”. Do you think that chopping and changing in that way is part of the problem, or do you think that is all irrelevant window dressing?
Professor Coyle: I do, absolutely. Torsten highlighted some of the short and medium-term issues. The broad trends in productivity across the G7 have been quite similar, but the UK has done particularly worse, particularly post-2008. There is not really a mystery about some of the things we need to fix—skills, the investment issues that we have been talking about, planning, infrastructure—but, as you point out, there is an awful lot of change. If the broad underlying trends are global, it is not that we do not know what to do; it is about how we do it. There have been just frequent changes. I do not mind whether it is called an industrial strategy or not, but we need some kind of long-term perspective—some kind of strategic approach to managing the economy.
There are other things in the Budget that are, at the margin, helpful. The innovation zones are an interesting idea, but it is quite small-scale. It is a five-year horizon. The different strategies highlight strengths that we have in the economy: AI, advanced materials and manufacturing, for instance. But if you break it down for each zone year by year, it is just over £4 million in capex. Over a five-year period, you might build a lab for that amount of money, but it is not going to transform anything. So it is partly about co-ordination, it is partly about scale and it is absolutely about consistency—or, rather, the lack of consistency.
Q25 Dame Angela Eagle: Tony, do you have any thoughts about how effective the labour market changes will be? Again, they seem to be quite marginal given the lack of labour supply following Brexit.
Tony Wilson: It is welcome that the Budget and the Chancellor are focused on employment as one of those four Es. Certainly one thing that has held back growth in the past couple of years has been this mismatch between demand and supply. Employers who have wanted to recruit, and invest in and grow their businesses, often have not been able to find the labour, so measures to raise participation are welcome. I think the measures announced in the Budget will make a small difference. The OBR are forecasting about a third of a percentage point increase in the employment rate, which is not to be sniffed at. It is welcome that the OBR are forecasting that; they have not always forecast supply-side measures in that way.
But there are things really missing from the Budget as well. As Diane said, this is a skills issue as well; it is a longer-run issue of how effectively our skills system can meet employer demand, and how much employers and Government invest in skills. There was vanishingly little in the Budget on skills, which is a surprise, because these are skills shortages as well as labour shortages. Given the focus on investment and enterprise, it was a surprise that there was really nothing looking at adult skills reform or, more broadly, at trying to better incentivise and support investment in workplace skills.
Q26 Dame Angela Eagle: Torsten, finally and quickly, there was very little on skills, as has just been said, and there were in effect cuts—or very tight settlements, possibly real-terms cuts—to public expenditure going forwards, on top of the £55 billion cut that was announced in the spending review. Do you think that that might prevent progress in reskilling and ensuring that our labour supply is more productive?
Torsten Bell: On labour supply, it is worth saying that there are a few moving parts, and we are focusing on one here. Obviously, the size of the labour force does matter for the level of GDP that we produce and GDP per capita. So, yes, the policy measures that Tony talked about are predicted to increase employment by 110,000, but on their own they do not even outweigh the downgrade to the participation forecasts, because we are a sicker country—to simplify the OBR’s position. Broadly, we are a sicker country, so it is saying that we will have 130,000 fewer workers by the end of the forecast than it expected, on the basis of the forecast changes. We then knock away most of that, because policy measures raise employment again by 110,000—this is all spuriously accurate anyway, but let’s just follow the thought pattern.
The reason why employment is coming in higher in the forecast, at the back end of this period, and the economy is slightly bigger, is actually that the migration assumption has gone up a lot. You have a 160,000 increase in employment from the migration numbers being higher, which is significantly bigger than the 110,000 you have coming through because of the policy measures. As always, you have to weigh up what is the underlying economy and what is policy change, and in this case it is the underlying economic changes—in both senses: in the negative sense, and in the positive sense to the size of the labour force—that are bigger than the policy measures. I think that has slightly got missed in just focusing on the change that the measures have brought. That is on labour force.
On what is going on with public expenditure, there are two things that matter for growth—there are obviously lots of other things that matter about public expenditure. If you look at what is happening to public investment, our big-picture diagnosis is that the country as a whole just does not invest enough, which is true in both our private sector—business investment is not high enough—and generally, historically, in the public sector. It is also true of training and our investment in people, as well as in other forms of capital stock. There were not further cuts to public investment in the Budget, but there were in the autumn. There is a good and a bad way of interpreting what is currently happening with public investment. One is that the level on average over this spending review period is higher than it was during the terribly low levels of the past almost three decades—very volatile over time, but overall just low compared with other countries over recent decades, particularly in the 1990s, but also into the 2000s. On average, that is the good news: it is better.
The problem is that it is clearly on a downward trajectory. The way in which the Government are to meet their fiscal targets, which, as we have discussed, are very tight, is by the autumn—as the Treasury will always do if you have a net debt target at the back end of the period without any protection for capital investment—cutting capital investment. That is what is happening. We are on a steep downward trajectory. That is really bad for long-term growth, and it is not just bad in the quantum, in the total amount of public investment going on; it is that it leads to really bad decision making. Talk to people running the investment programmes in the big parts of our public sector, and they will say, “I’m only going to pre-commit half my budget for four years out, because I have no idea what the actual budget will be, because these maniacs keep surging up public investment forecasts for spending, then slashing them again afterwards.” That is a really bad way to do public investment.
Q27 Danny Kruger: I have a question for each of you and 10 minutes to get through them. Diane, I was struck by your answer to Angela about the challenge of consistency in policymaking and the need to achieve more stability, yet we also want, as you suggested, a strategy. In a sense, you want some big decisions to be made and then the Government to stick with them. The question is: what are those decisions? You are really asking for a big bet to made on the future of what the country should be like. In quite general terms, if you can try to summarise, what is the bet we should be making? Is it on being a science superpower? Is it on promoting manufacturing in the regions? Or, to the point Torsten made, should we continue to be a finance-rich economy with growth driven from the south-east, generating revenues that can be redistributed? Do you see a set of choices there? Which is the one you would go for?
Professor Coyle: You have highlighted that we are in a paradoxical position. I am arguing that there has been too much change—this is not a particularly controversial view—but we probably need to change something to improve our growth trajectory. I have long been an advocate for the idea that we are not going to get faster national growth if we are only flying on the London and south-east engine, and it is not a negative-sum game or a zero-sum game that other parts of the country could grow as well. I do not think there is a single big bet. You can also overstate the amount of churn. The different strategies we were talking about earlier focus on some obvious strengths that we have in the economy, and those strengths are associated with particular places. That is all perfectly sensible. One question is whether the bets we are placing are big enough. They do not have to be huge, but often they are not big enough; they are small changes spread very thinly. Not everywhere is going to have a cutting-edge biotech centre.
Another aspect of this is infrastructure and enabling the growth. Why we haven’t upgraded northern rail after all these years of discussion, I do not know. The impact that could have on productivity, the travel-to-work area and the career possibilities for two-career couples in those northern English cities seems quite obvious. There is a bizarre and, I think, Treasury-inspired way of looking at those investments project by project, when you need to think about the strategic framework in which they sit. That has improved a little bit with the Green Book revision. It is about asking not just, “Does this single railway line deliver the return needed for the public or private investment?” but, “What else will we put around that? Can we make sure the bus routes join up to the stations? Can we make sure that the housing, or the laboratories, can get built?” It is that kind of co-ordination.
Co-ordination is difficult in the centre; it is much easier at local level. That is part of my case for devolving more powers. I was pleased to see some small steps in the Budget towards further devolution.
Q28 Danny Kruger: That is helpful, thank you. Torsten, Diane recently wrote—you may have, too—about the challenge to productivity, and ultimately growth, through the concentration of certain markets. It does strike me that we have in this country a series of cartels in the big industries—supermarkets, house building, banking. The Government are trying to deregulate banking to promote innovation in financial services, but do you see a missed opportunity to encourage more diversity in the markets that deliver those other important services?
Torsten Bell: That is a big question. Diane has definitely written more about that than I have—in particular, on what a forward-looking reform agenda would look like in the digital sector—so you should ask the expert.
More broadly, our work in this area shows a number of things. First, you definitely saw during the 2000s an increase in the share of the economy taken by larger firms. That is consistent with what we see across advanced economies: as we have globalised, what it takes to be at the frontier of most sectors has become bigger, so domestically, you see your largest companies taking a larger share of your GDP over time. That has actually steadily come down a bit. It is not back to where it was in the early 2000s, but it has come down a bit over the course of the last few years.
In some ways, I would worry that some of our biggest firms aren’t doing very well and aren’t investing enough, and they are the ones we rely on for some of our international competition. So I do not think it is as straightforward as, “The competition has got worse, big firms are evil, and that’s bad for our growth,” but yes, we have seen a bigger concentration. I would note that their share of employment did not go up. The share of output driven by the biggest firms went up in the 2000s and peaked just after the financial crisis, but they are not employing more people; they are just doing more of the production.
I would focus somewhere slightly different as the problem. This is a big mistake—the economics profession does this, and policymakers definitely do it. Because we are quite focused on the new stuff, and we are humans, everybody likes to say, “Change is really fast. Everything’s changing all the time. That’s the problem,” and that does not stack up with the British economy today. If anything, I would say that a lack of change is a significant problem in large parts of our economy. If we look at levels of dynamism defined as how some sectors are shrinking and others are growing, people always say that AI and other words that sound techy are driving loads of change, but actually, the reallocation across sectors in the UK economy is possibly at its lowest since the 1930s, and that reallocation is a lot of the way in which we get productivity growth historically. The last big fast change was in the 1980s, and that had some big downsides as well as some big upsides, but we should focus on the lack of dynamism as much as on the lack of competition.
Q29 Danny Kruger: That is a good distinction; thank you. Tony, I do not think you have commented yet on the childcare reforms. Could you give us your reaction to that? How much do you think the new entitlement for parents of younger children will drive labour force participation, given that, as I understand it, only 40% of parents take up the three to four-year-old offer at the moment, so it is not necessarily that effective? Why should we think it will be any more effective—in fact, should we not think it will be less effective—at getting parents of younger children into work, just because they have this rather inflexible entitlement?
Tony Wilson: There were a couple of childcare reforms in the Budget last week. The major £5 billion-a-year expansion in free childcare is an entitlement that everyone will receive, so that will have some impact on labour force participation. The OBR is forecasting an impact of 60,000-odd more people in work. It has also said that there will be some impact on people who are already in work being able to work longer hours. The entitlement should, in theory, reduce childcare costs for people who are already in work, which will be welcome. In practice, though, there are quite significant challenges around whether the market can grow quickly enough to meet that demand and whether it will look to offset some of the costs of providing that offer through raising fees outside those core hours. The Early Years Alliance and others have raised these concerns.
We have been looking at the online vacancy data to give us some insights on this, and it appears to be the case that there are significant struggles at the moment with filling childcare vacancies. Advertised salaries for childcare workers have risen by about 25% or 30% between 2019 and now. Advertised salaries in the wider economy over the same period—this is data from Adzuna, which collects data aggregated across the economy—have grown by around 5%. There are definitely some struggles in filling those vacancies, which could constrain it.
Q30 Danny Kruger: I have a supplementary question, and then I will finish with a question to Paul. What is your sense of the right balance between HE and FE investment and numbers—young people going to university versus going into vocational training, into an apprenticeship or into work? Given the need for labour in the economy, do you think we are getting it right in terms of the number of people we support to go to university?
Tony Wilson: I am not sure there is a right balance. We can definitely do more on apprenticeships to ensure that we are enabling younger people in particular to access high-quality vocational learning, which will lead to future careers.
Q31 Danny Kruger: You might want to comment on that as well, Paul, in the minute I am allowing you, but I also want to ask you about migration. There is predicted net migration to the UK of a quarter of a million people a year, as a necessity of the growth forecasts that the OBR has set out. Do you think that is appropriate? Do you recognise the argument about the impact on GDP per head rather than GDP overall? What is your sense of the virtue of the rate of migration that we are now predicting?
Paul Johnson: The OBR is only taking the ONS projections. This is not, in any sense, a policy decision by the OBR. It is, of course, very striking, given the big fall in immigration from the European Union—and there will be a very big change in the structure of that immigration. It reflects what companies perceive as a significant lack of labour within the UK economy. Those companies are responding to that by making use of the various Government schemes that exist. Clearly, in an arithmetic sense, this will increase the overall size of the economy. It is quite difficult to think about what the counterfactual would be if we simply stopped that, in terms of wellbeing per head. Would that result in wage inflation, or in parts of the economy closing down? That is really hard to assess when we are looking at big change. The UK economy is entirely different to what it would have looked like had we not had the very high levels of inward migration over the past 20 years.
Honestly, I worry about some of the tools that economists use to look at the impact of these small changes in migration and then talk about what the overall impact on economy will be. It is very difficult when you are looking at what are big structural changes to the economy over a period of time. So what is the counterfactual under which we have zero net immigration over the next five years? I cannot quite get my head round that question.
Q32 Danny Kruger: Can you say a word about what you think the long-term economic effect will be of the immigration that we are now predicting?
Paul Johnson: Long term, immigration tends to be employment rich. It tends to be good for the public finances, rather than the reverse. The extent to which it allows, for example, companies to invest less than they otherwise would have done in the skills that are needed—or, indeed, Government to invest less when they are talking about training doctors and nurses—means, in a sense, that there is a net gain, because we are investing less, but getting the benefit. However, there is potentially a net cost in terms of the opportunities that it provides.
Q33 Douglas Chapman: I wish to ask you a few questions on the business investment part of the Budget. The OBR analysis shows that business investment during this period has not much improved since 2016. How disappointed should we be that that is still the case, especially as the Government have set a great deal of store by business investment and, by extension, growth and productivity as well?
Torsten Bell: On the levels of your concern, I think we should be very concerned. We should also be disappointed with ourselves. There are at least two mistakes going on. One, we are putting a lot of eggs in the changes to the tax system to sort out Britain’s low investment basket. On top of that, we are responding to that by tweaking the corporation tax system not just over the 30 to 40 years that Diane outlined, but over the past two, where there have been five major changes to the corporation tax regime. So we are saying that it is all about taxation, and then we are doing silly things with the tax system. In the underlying positions, the levels of investment in our country—both business investment and public sector investment—are too low. That is a long-term driver. All of our gap in productivity with France is explained by our lower capital stock, which is by lowering investment levels year after year after year.
If we take the course of the past 50 years, we see a pretty decent bounce back from the financial crisis during the early coalition Government, and then we basically miss out on all of the investment growth that other countries saw in the second half of that decade. We flatlined, everyone else soared. In so far as there was a global boom going on, that is when it happened. We did not see that. There have been some revisions to the data recently that make the bounce back from the pandemic on business investment less grim than they looked before, but they are still pretty bad. If you look at the OBR’s forecasts, we are talking about severe national underperformance.
Q34 Douglas Chapman: Paul, did you have anything to add to that? You were nodding away there.
Paul Johnson: I was nodding away because it is hard to disagree with anything that Torsten has just said. The lack of consistency in policy is clearly a problem. Something that we talked about—perhaps it is not the right place to talk about it—is that the political instability is a problem for companies looking to invest, and that is clearly part of what is going on here. This is a big problem, and I very much agree with Torsten’s estimate of the size of it.
Professor Coyle: It is a longer-term problem as well. If you look back to the early 1990s recession, all the G7 countries saw a big drop in business investment. In other countries it recovered, but it did not in the UK, so we have been at the bottom of that league table ever since.
Tax will make a difference, but it is not the only thing that matters, and surveys of employers tend to highlight poor infrastructure and lack of skills, which we’ve already been talking about. Lining up all the different things that matter is obviously part of the challenge—so, consistency and making the system work as a whole.
Q35 Douglas Chapman: Diane, I think you mentioned research and development before as well. There was a commitment to a £22 billion spend on R&D. That didn’t rate a mention in the Budget at all. Has that just been knocked off to one side, or do you feel that that is still a key driver for future growth?
Professor Coyle: It is another area where there has been quite a lot of change over time—quite a lot of churn in the policy. Research-intensive companies will do research—it’s what they do—and I wonder whether a bigger problem there is where they go after their early stages. In the Furman review, which was about digital companies, a lot of the evidence we got was that the only exit for their funders was to sell out to a bigger company. Looking at those kinds of structures, what has happened to public markets and how you do the scale-up and how you get the skills, as well as the infrastructure, seems to be part of the challenge.
Q36 Douglas Chapman: Quite a few others through the whole session have mentioned infrastructure as well. What do you think the impact will be of the investment zones that the Government have announced, in terms of the actual impact on growth, productivity and—the other big E for me—exports, which didn’t get a mention either in the Budget? How do you think that might impact, perhaps at the UK level? We are probably underinvested at the moment.
Professor Coyle: Positive, but quite small scale; that is the issue there. It’s not obvious to me how it’s all going to work, either; it’s quite a complicated structure. However, the basic idea of investment zones around some core intellectual asset or research asset is a good idea.
Q37 Douglas Chapman: Yes, but how does that fit in with the “everywhere” theme? When we looked at the freeports, there was a bit of a bidding war going on between various areas, and the ones that lost out feel that their future is not as secure perhaps, or that they don’t have the same opportunities going forward. Will the same thing happen with this?
Is there a case to be made for substantial investment in other parts of the country outside the south-east? I can’t remember the last time that Wales, for example, had an investment the size of Crossrail—£18 billion on a single project. When did Wales last get something like that, or Northern Ireland, Scotland or northern England? Is it not best to look at some of these big projects and try to even them out over the country, rather than doing piddling little amounts in various little places across the country and make them try to make that work for everyone? The south-east is an important driver for the future economy, but it cannot be the sole source of our economic activity across the UK.
Professor Coyle: Well, I would hate to see us neglect the research strength that we’ve got in the south-east as well, and being able to build new labs and improve the infrastructure matters there, too. But obviously transport infrastructure is key in other parts of the country; south Wales, as you say, is another area that very much needs it.
The investment zones identify around the country underperforming productivity areas and they enable the flexibility for areas to pick out their particular strengths, so I think that all seems pretty sensible—if it’s Manchester, it might be manufacturing or raw materials; they are quite broad categories. It’s just quite small; it is not going to be transformative.
Q38 Douglas Chapman: Okay. This will be a final question about what the Government should be doing. Maybe I could just get a quick answer from each of you. What would be the way forward and the best way to promote business investment if you were sitting in No. 11?
Torsten Bell: Given that you have decided on the tax side—which is what a Budget is generally about—that you want to have full expensing and you say you want that permanently, get on with doing it and stop letting the fiscal wolves dictate what that means, but then recognise that tax is only a small part of why people haven’t been investing in Britain recently. Political and economic stability is more important, and so is clarity about what the longer-term growth strategy is, which in the end for the UK as a whole is likely to be in the high value added service sectors and should be about making sure that our biggest cities outside London, particularly Birmingham and Greater Manchester, are able to be part of that.
Tony Wilson: I will pick up a point that Diane made about co-ordination and devolution. Business investment needs to go hand in hand with greater powers locally to co-ordinate and invest in some of the supply-side measures that are needed to maximise that—in particular, things about boosting labour supply and improving skills investment, as well as things about housing, access to public services, and transport. On that, there are proposals—the LGA have had proposals; in Northern Ireland, people are making reforms through local labour market partnerships. There are approaches we could take to better join up how you invest in people and places as well as trying to incentivise business investment. Those things need to go hand in hand; otherwise, there is a risk that the investment can’t lead to growth or doesn’t lead to sustainable growth because it’s in effect competing with other parts of the country.
Professor Coyle: I will go for the same one. The information that you need is local knowledge; you can’t know that at the centre.
Paul Johnson: To repeat, this is about education and particularly further education, post 16; infrastructure and particularly the sorts of things that Diane was talking about earlier—good infrastructure in terms of transport, housing and so on—and devolution, so that these things can be properly co-ordinated, with not everything being planned from Whitehall. So it’s education, infrastructure and devolution.
Q39 Emma Hardy: Morning, all. Torsten, I was reading the Resolution Foundation analysis, which says: “The falls in household disposable incomes this year and next…are the worst in a century, and with a slow recovery thereafter incomes are expected to be lower in real terms at the time of the next election than at the last—for the first time on record.” Just how painful are the coming years going to be?
Torsten Bell: They are already quite painful, as everyone knows, both from their personal lives and, in your case, from your constituencies. The message in the Budget is that the fall in incomes isn’t quite as bad as we feared in the autumn, mainly because the fall in energy prices—wholesale prices—since the summer has been quite significant. They are down by half since November; they are down by 80% since the summer. The danger is this. In forecast terms—people who are looking at the change in terms of what’s in the OBR’s document—you think, “Well, things have got quite a lot better since then.” The problem is that, for punters, that isn’t how it will feel, because energy prices are still significantly higher than their pre-crisis norms and because of the level of Government support, which is really significant—over these two years, the Government is spending about £2,500 per head on helping households to deal with the high energy costs.
That shielding is very significant, but the shielding is tapering out over the course of next year. That is for understandable reasons—the Treasury doesn’t want to be permanently subsidising household energy bills—but the result is that, even though wholesale prices are down, the amount that households will actually spend on energy bills next year is about 17% higher than this year. The wholesale price crisis was worst this year, but the retail price crisis is worse next year, which is why you have a two-year living standards squeeze, two years of income falls—not just one year—in the OBR’s numbers.
Q40 Emma Hardy: So you are expecting it to get worse.
Torsten Bell: Well, their forecast is for people’s incomes to fall next year, not to recover. I think that is right, given that our analysis shows that people will be paying more in energy bills next year. I should say that, for people on lower incomes, the amount of support is going down but the progressivity of the support is going up, so poorer households will get a bigger percentage of the support from the Government next year. But the overall level of support is down very significantly, and the result is that people are going to be feeling squeezed. Obviously, on top of that, taxes are rising, particularly on middle and higher-income households, during that phase. So those things together are telling you the country has got poorer. We are getting poorer, I’m afraid, in a number of different ways: real wages falling, taxes going up and energy bills being higher than we hoped they would be. Those are all playing out, and the net result is that we are all feeling squeezed. It is really significant. You can see that in the data, but you can also see it if you wander down to your local food bank; you will all see that in your constituencies.
Things are really tough, and the reason why it is so hard for Britain to deal with that— All of Europe is dealing with that. I said it is slightly worse in Britain because of our reliance on gas, but all European countries are dealing with that. The reason why it is particularly bad in Britain is that it is happening on the back of the 15 years of slow growth that we mentioned earlier, and we are pretty unequal. We are the most unequal large economy in Europe. If you have low growth and you’re very unequal— Poorer and middle-income households have very low incomes compared with other large economies, what we consider our comparator economies, in northern Europe, so when a cost of living crisis that is now quite acute hits us, the people living with it are dealing with it with lower margins to cope. For example, the amount of the household budget that the poorest households spend on essentials, which are hard to cut—housing, food—has gone up from a bit over 50% to nearly 60% over the course of those 15 years. So their margin for adjustment when the energy bill crisis comes along and hits us is really very low. That is why, even though Europe as a whole is sharing some of those problems, you get the really acute ends of the problems you see.
Q41 Emma Hardy: The main repercussions are that poorer people are going to suffer greatly in the next couple of years.
Torsten Bell: Yes. They already are. You are seeing that up and down the country.
Q42 Emma Hardy: Paul, you said that “these will be the worst two years on record for household incomes…projections suggest that real household disposable incomes will be no higher in 2027 than they were in 2019…a lost decade for living standards.” Could you briefly comment on that? To what extent do the frozen tax bands have an impact on pulling more people into paying taxes who maybe previously did not?
Paul Johnson: I don’t want to repeat what Torsten said, but last year, particularly after the spring, we clearly had wages rising a lot less quickly than prices. There is likely to be a bit more of that this year, and then it is going to take a couple of years to recover to where we were at the time of the last election. That is off the back of a decade before that of very poor income growth, but very poor earnings growth in particular for working-age households over that period.
What makes that more substantial in terms of the impact on household incomes is that the freezing of personal tax allowances and thresholds is a really very big tax rise over this period. If you look back to when this began last year to when it is intended to end, we are looking at something like a £30 billion tax increase. Just this year alone, the freezing of tax allowances will cost basic rate taxpayers about £500 a year on average, and higher-rate taxpayers about £1,000 a year on average.
Now, we know why these tax increases have been put in place, given the state of the public finances, and given the desire to spend more on public services. The choice has been made to raise tax in that particular way, as well as the big increases in corporation taxes. But when you are, as we are, going through a very sharp increase in the tax take as a fraction of national income, which is a response to slow growth, pressures on spending and high levels of debt interest payments, that will have—and is going to have—a significantly negative effect on household living standards.
Q43 Emma Hardy: Absolutely. Diane, I wonder if you could comment on the regional difference. I was listening to your evidence earlier. You were talking about the need for equal growth, which we are not having, and how we are being powered too much by London and the south-east. This impact on living standards—could you comment on how that plays out regionally?
Professor Coyle: Living standards over the long term depend on how productive firms are. Can they create jobs that pay people good wages? That is linked to all the issues that we were talking about earlier. Do they invest? Do they have capital equipment? Can they get the skills they need? Can they get access to market?
If you look at the past decade or so, what has been happening to firms, even within a given industry, is that the dispersion of productivity has increased. There are some very productive firms. Their productivity growth has slowed down, but they are pulling further and further ahead of all the rest. Firms that are operating outside London and the south-east tend to be the ones in the low productivity part of that distribution.
How do you resolve that? How do you get them to become higher-productivity, higher-investment firms? It is about lining up all of the same things that we have been talking about. Can they get the mid-level technical skills that they need? Do they have the apprenticeships? Do they have the means of learning about using new technologies? It seems pretty hard for some smaller companies in particular to start to use these new technologies and raise their productivity.
I don’t see, by any means, a quick fix, but if we want to see incomes rising across the country, as well as across the income distribution, we have to focus on the productivity problem among Britain’s firms.
Q44 Emma Hardy: Tony, I noticed your reaction when we were talking about changes to the work capability assessment, universal credit and disabilities. Do you want to comment on the changes that the Budget introduced, and the impact they might have on living standards?
Tony Wilson: I am pretty worried about them. There are quite significant changes. The work capability assessment as we know it will be abolished, and assessment for extra costs support will be solely through personal independence payment in future. The worry, though, is a line that says that the benefit conditions—the requirement on people with long-term health conditions to attend jobcentres—will be determined by work coaches and advisers. There is really no evidence that that will increase labour supply. Sorry, there is very little evidence either way. If anything, what evidence there is suggests it could have the opposite effect, because it could put us back in the situation we are in with the WCA—with people feeling that they have to prove that they are too sick to work in order not to be required to attend jobcentres. There is some evidence that increasing conditionality and sanctions on disabled claimants of the old jobseeker’s allowance regime was associated with higher economic inactivity among those groups—among disabled people, so the change could have the opposite effect to the one intended. Also, it will significantly increase risks around mental health and hardship.
The broader context is that we have too punitive a system. We probably have one of the toughest sanctions systems in the developed world. Often, people are sanctioned by computer for failing to attend appointments, and see their benefits cut for significant periods of time. About one in 12 people is under sanction in the main conditionality regime. That is why many disabled people and people with long-term health conditions are so nervous and so concerned about the risks of being required to attend jobcentres. It is because of their experience of people being sanctioned, usually for missing appointments.
Q45 Emma Hardy: Would you briefly comment on how those sanctions impact living standards, and the poverty that we know so many people face?
Tony Wilson: There is a wealth of evidence. Sanctions increase offloads from benefit, and there is some evidence that they increase inflows to work. That is what the Treasury clings to. It is often lower-paid, less secure work. There is then a wealth of countervailing evidence around wider impacts on living standards, health, families, and other factors. Undoubtedly, that has an impact on living standards, because we have less generous systems for providing additional emergency support when people are under sanction. Often, if the primary claimant in a couple household, or in a family, is sanctioned, then you still need some means of providing income and support to the children in that family, for example. Those hardship fund systems have been reduced over the last decade. It is concerning.
However, coming back to the point about the disability assessment system, we will still need some element of health professional input in determining whether people are able to look for work, so I think we are not quite off the hook yet on having some element of health assessment in the benefits system.
Chair: Thanks. I am sure that the Work and Pensions Committee will also ask lots of questions about this, because it is a very important topic.
Q46 Anthony Browne: My questions will be about the changes to pension taxation—an exciting subject that we talk about down the pub the whole time. Obviously, this was one of the main lines of criticism around the Budget. I will ask Tony this first, because this relates to employment, but maybe it is also for Torsten and others. The immediate cause of this was doctors and the concern about them being forced to retire early, but there is already a scheme in place for judges, which exempts them for the same reason. Whatever the other reasons for the changes—maybe the Chancellor was fed up with NHS trusts not doing it; I think you mentioned that earlier—when he announced the changes, he said that when the Treasury looked into this, it saw that this went far wider than doctors, and that is why they did this. Do you agree that it is wider than just doctors?
Tony Wilson: Not really. Not on the labour supply point. The issues around the risks of people withdrawing their labour are fairly unique to those in defined benefit pension schemes in the public sector and higher-paid staff, whether that is doctors, senior civil servants, chief police officers or headteachers.
Q47 Anthony Browne: But they are all in the same boat, aren’t they? I get the point about public sector DB schemes. We had feedback from police and crime commissioners, who said that the changes are incredibly helpful for senior police officers, because they had the same problem there.
Tony Wilson: Exactly.
Q48 Anthony Browne: Local authority chief executives said it was very helpful because they had lots of senior staff in the local authorities.
Tony Wilson: And many directors and director generals in the civil service will say the same.
Q49 Anthony Browne: It is senior teachers, prison governors, Government scientists, air traffic controllers—because all you need is a DB scheme pension of £50,000 a year.
Torsten Bell: When you say “all you need”—
Anthony Browne: It is a lot.
Torsten Bell: It is a lot.
Tony Wilson: If you are solely trying to solve that problem, you have different options to do that. One might be to have a targeted approach around the tax system, as with judges. I think others will comment on that and the legality of doing that. One option would be to change the scheme rules in some way to allow people to stay in those schemes at a lower level of contributions, for example.
The third option would be to pay people more money. Not all these schemes are funded in the same way. Take the USS—the universities superannuation scheme. Around 20% of that is employer contribution. That goes directly into the USS. Pay that to the individual. Associated changes would have to be made, but there are things you could do.
Q50 Anthony Browne: I agree. We have to reform pretty much all pensions, but those are really long-term, difficult and complicated changes.
Tony Wilson: Yes. The risk on the labour supply point, though, is that any benefits we get through, in effect, reducing tax on labour overall and, in particular, solving these issues in the public sector could be outweighed by a negative effect on labour supply, because people with significant incomes will be able to save significantly more on their pensions. One would expect that they would use that to retire earlier, rather than later. That is certainly the lesson from raising the state pension age. We tend to view increasing pensioners’ wealth as encouraging people to leave the labour market earlier, and reducing their wealth as keeping people in the market longer.
Torsten Bell: There are a number of components to go through. I agree with you that the Chancellor is motivated by the desire to solve a genuine problem, which is the outflow of senior doctors from the NHS. That is being driven partly by this pension issue, and partly by low morale and all the other issues that you would all find from talking to doctors in your local hospitals, and indeed to GPs.
The exam question is not, “Is there a good objective?” It is, “Was there a better way of achieving the objective?” Is the wider cost of £1 billion to achieve that the best value for money for the taxpayer? You need to consider the alternatives.
The Chancellor mentioned the option of following the judges scheme. It would be legally challenged, for the reasons you raise, but I think the legal advice is that it is not clear cut that you would lose. The fact that the Government went ahead with the judges scheme tells you that they think there is a defence.
Q51 Anthony Browne: As an economist, you must feel that there is something systemically wrong if you have one scheme for judges, one for doctors, and another later for the police. Clearly, there is something wrong with this.
Torsten Bell: It is suboptimal, and so is spending £1 billion. That would be challenged legally, and it would take longer to implement than what the Government have chosen to do today, but it would cost less than £1 billion.
There is a second option, which I think would have been a better way forward, and which the Treasury has rejected on the basis that it is not sure that NHS trusts could do it, though I don’t agree with that assessment. Good trusts were already moving ahead with giving senior doctors dual contracts: one until they run up against their pension limits, and one for afterwards. It would have been more useful to give all those trusts shared legal advice saying, “This is completely fine. Here is how to do it. Off you go”. Then you do not get into what you are worried about, which is legal issues and different pension tax systems for different kinds of workers—which we have already done for judges, so if you do not like that, you should be opposing what happened to judges.
Q52 Anthony Browne: I am not defending the one for judges.
Torsten Bell: All I am saying is: change the contracts for doctors—and, while you are at it, other senior public sector workers. You have to be pretty high-earning, and you have to be on a final salary scheme, probably not just an average salary scheme, to get to some of these really high pension limits.
Then you have to step back and say, “Who benefits from this scheme?” We do not have the exact numbers by occupation, because HMRC does not tell us exactly who is paying the lifetime allowance charge when they exit. We can step back and use what we know from the wealth and asset survey about who has the highest pensions. That is calculated on a different basis from a tax basis, but let us look at who has million-pound pensions in that data set. Yes, it is lots of doctors. About a quarter of them are doctors or other senior, high-paid medical staff, but 20% work in the financial services sector. There are nearly as many bankers in the group as doctors.
If you look at the group below the £1 million threshold—people who could benefit, because they will now save more and go over that threshold—it includes a lot of people working in manufacturing. Only about half are in the public sector when you look at that lower threshold. Obviously, the benefits of this tax cut will be very significant if people can also save more if they were already going to be over the £1 million threshold. All I would say is that I think the change is being made for good reason. There is not a perfect answer, but the HR answer may have been cheaper and easier than the tax answer.
Q53 Anthony Browne: I do not think we know the data for this, but it might be that people in the private sector are also retiring early as a result of this tax charge, although I guess they could just not continue paying into their pension. The private sector also does good work. It is not just doctors who do good work, and you want experienced people in the private sector to carry on working.
Torsten Bell: Absolutely. Airline pilots would raise that. There is an argument there, and if you look at who the very highest pension value people are in the private sector, they are on legacy DB schemes. That is why manufacturing looks so outsized. Generally, our legacy schemes—
Q54 Anthony Browne: People working for Shell and stuff like that.
Torsten Bell: There will be a handful of those kinds of people, yes. At that point, you get to a very large pension pot, but you have to take an on-balance judgment. The Chancellor has not done this because he wants to give loads of rich people loads of money, so that is not the problem. The question is whether, in value-for-money terms, this was the best way of achieving an important objective.
Q55 Anthony Browne: I think you mentioned the cost of £80,000 per job. I have to admit that I am extremely sceptical about all the data around this, and I will tell you why: lots of people have multiple pension pots, and there is no shared data about what they all add up to.
Torsten Bell: The wealth and assets survey will tell you their total pension. You have just cut funding for the wealth and assets survey, so there should be good lobbying for the Treasury to fund that survey, because it is very important for research.
Q56 Anthony Browne: But a lot of people would end up not paying into pensions at all because they are getting up towards the limit, or they would retire early. You are using the data to say that people are paying the lifetime allowance charge. Actually, most people in their right mind would do everything they could to avoid it, because it is completely punitive.
Torsten Bell: There are a number of different elements there. It is a complete pain to have to engage with the lifetime allowance—I am totally with you on that.
Q57 Anthony Browne: I would do everything I could to avoid it.
Torsten Bell: And other reasonable people will do that as well. But you have to step back and say: why did we have it in the first place?
Q58 Anthony Browne: It was to raise money.
Torsten Bell: You can say what George Osborne was planning when he significantly reduced it, but that is not the original reason we have it. The reason we have it is because our pension tax system is generally aiming to provide people with equal treatment, whether they spend their money in retirement or in working life; it allows them to smooth consumption over their life cycle. However, it then gives them an active incentive—it is not neutral—to do so in three different ways: via the tax-free lump sum, which is hugely beneficial to those who are able to draw it down, because it is a very large tax advantage; lower national insurance payments, because it is not equal treatment in working age and in draw-down; and very generous inheritance treatment of it.
This is a tax-advantaged scheme. Because of that, the benefits are incredibly focused towards higher-income households, and we did not want everybody piling huge amounts of money into those tax-advantaged savings once the overall objective of pension tax relief had been achieved, which is to encourage everybody to save enough for their retirement. We put a limit on the scheme to stop people getting very, very large tax advantages over time—and, in brackets, to prevent some kinds of tax avoidance. There were reasons we had the lifetime allowance. If you want no lifetime limit, which I think, for the reasons you are outlining, would be a better long-term objective, you have to deal with the underlying problems in the pension tax system, which lead to the highest earners getting a very large share of that tax relief.
Q59 Anthony Browne: I agree that pension funds should come into the inheritance tax scheme, which is a whole separate debate. The lifetime allowance is obviously about the amount saved by pensioners, rather than the amount put in. You also have the annual limit, which limits the tax relief given annually. That has gone up to £60,000, although I notice that under the Labour Government, it was a quarter of a million, so it is still a quarter of the level it was under the last Labour Government. One of the problems with the lifetime allowance is that when you start saving, you do not know how much your savings will go up to. You could have worked at Google in your 20s and got a few Google shares in your pension, which are suddenly worth £1 million, and you do not really have any tax relief on it.
Torsten Bell: We do generally think that we should tax people who have had very lucky upside returns over the course of time. That is a general principle of the tax system.
Q60 Anthony Browne: But it is a very punitive outcome, and you are stopping them saving up for later on.
Torsten Bell: It’s not “very punitive”. It is broadly equal to what they would have paid if they had received that as income.
Q61 Anthony Browne: It is 55%.
Torsten Bell: Let’s not get into the weeds of how that actually operates. Broadly, the levels of taxation are set to not be totally punitive. They are broadly what you would pay if you were receiving that as income at a higher rate of tax.
Chair: We can return to this in other sessions.
Q62 Anne Marie Morris: I think all of you have said that we are heavy on financial services, and that we need to do more to encourage manufacturing and so forth. Indeed, the capital allowance is now R&D tax relief, which clearly will not benefit those in the service sector; it will benefit those in manufacturing, research, tech and so on, which must be a good thing. Paul, I think you, Torsten and others are 100% agreed that this has in a way misfired; because it is temporary, it gives rise to uncertainty, and so the ability to predict behaviour is not what you would have liked. It is not perfect, but what will it deliver, despite your misgivings about how this has been done? Will it do some of the things that the Chancellor wanted it to?
Paul Johnson: It will do some of them, yes. As well as the temporary nature of the measure, there are a couple of other things that it is important to be clear about. First, it does not refer to all possible investment. It distinguishes between different kinds of investment and is particularly generous to plant and machinery—it is not so generous to buildings, for example—and that is not ideal in a tax system.
Secondly, because of the way that we treat debt-financed investment, which is more generous than the way that we treat equity-financed investment, the measure will subsidise investments that, absent the tax system, would not be economically viable. That is also not an ideal aspect of a tax system.
That is all part of the problem with the system, which is that it is not reformed, or not taken as a system with a clear direction at the end point. It is messed around with bit by bit, all the way through, so we still do not know what the end point is. The Treasury will have known that they were putting in place a system that would subsidise uneconomic investments financed by debt, but they were not in a position to make those changes now, and I do not know whether they will be in future.
However, in the short run, having expensing as opposed to the less-generous system that we had will result in some more investment. Now that the OBR has got some estimates in there, which look as though they are in the right ballpark, it has dialled down its expectations because the super deduction did not have as big an effect as it previously expected. Broadly speaking, over the next three years, we expect more investment than we would have had in the absence of this.
Q63 Anne Marie Morris: That is helpful. Torsten, what should the Chancellor have done differently to overcome the problems that Paul has identified?
Torsten Bell: Whatever change you want to make to the corporate tax system, you should make it permanent, ideally in a way that combines sufficient cross-party consensus, so that firms think it will last. I saw that the shadow Chancellor has announced that she would carry out a review of the corporate tax system. I don’t know what that will conclude, but businesses looking at that are thinking, “Well, I have no idea what my corporate tax regime is over the course of more than three years,” and most investments, obviously, pay off over a significantly longer time period than that.
I would highlight the issue that Paul raises about different kinds of investment. Birmingham, for example, needs more investment in buildings—in office space. It has a low amount of office space compared to what it will likely need if it is to be a high-productivity city in the medium term. However, we are deciding that that is not the kind of investment that we want to encourage. It is not clear to me that that is the right way to build a system.
More generally, I would say that we are focusing too much on the tax system as a route to raising business investment. As Diane says, we have had a lot of different tax regimes since the mid-1990s, which is when we moved to being a low-investment regime. None of them have dealt with the underlying problem. I would focus much more on Britain’s low saving rates, how much that is associated with our pension schemes, how pension saving happens, and how those schemes are regulated, because although we have global capital markets, in practice, savings are sticking within the country in which they happen. I would focus much more on those kinds of things. If you want to know why firms cannot raise capital and have to sell out to foreign firms, those things have much more to do with it than what the corporate tax regime is.
I would focus on those bigger questions—a stable macro-economy, slightly more stable politics, and, yes, a stable tax regime, but don’t keep fiddling with it to get to some kind of optimised world, and then be clear what your overall strategy is, so that firms know what they are operating in. For example, are you clear as a country that there isn’t a route to becoming a higher-productivity Britain without a higher-productivity Greater Manchester and Birmingham, because that’s where the people are? No. And that is where you have to focus your resources.
Q64 Anne Marie Morris: If we move on to R&D, there was some help there, but it was not as generous as in the past. Certainly, when I talk to pharmaceutical companies and my science companies, that is really important to them. Should we have done more there, and if so, in what way? It seems to me that for everything you have all said, we do need the research and the investment. We need to look at the industries of the future, to move us away from being fintech-heavy. Diane, what could or should we have done differently, in terms of R&D?
Professor Coyle: The tax system has done a lot of favours for the pharmaceuticals industry in particular, previously through the patent box. It would be quite hard for them to complain that, over a period, they have been hard done by. As I said before, if you are a research-intensive company, you are going to do research. It is nice to have the tax incentives, but that is not what is really going to drive your activity.
It is the essence of these companies that they do research. A stable R&D tax structure, but behind that, public investment in basic research, looking at the process by which that gets spun out, looking at how smaller companies scale up into bigger companies, are all part of the story of how we become a frontier, research-intensive country.
As Torsten said in a slightly different context, you do not fix these problems by fiddling with bits of the tax system. Think about what you want the R&D tax credits to achieve, put the provision in place, try to leave it for a decent amount of time, but also think about all the other pieces of the jigsaw puzzle that give you that high-research economy.
Q65 Anne Marie Morris: Diane, whenever you are looking at some of these new innovative businesses, some of it is about R&D, but a lot of it is about people. If you are setting up a new gene therapy unit, you need to train hundreds of people to deliver this the right way, in different parts of the country. At the moment, unlike other countries, we do not have any grants, if you like, for companies to undertake that training programme. We have talked a bit about people and skills, but this is slightly different. What could or should the Government have done differently to try to deal with that issue, which is a big problem for the life sciences, I am led to believe?
Professor Coyle: If you talk to companies in research sectors, the main complaint I hear for sure is about lack of appropriate skills. It is not a lack of people with PhDs who are having brilliant ideas. It is those mid-level technical skills. It is the lab technicians and that level of skill. That takes you to the issues Paul raised earlier about further education, apprenticeships and pathways.
Those are also quite granular skills. They are very different; you might need a different kind of electrician in a certain sector. That is where the local knowledge comes in. Around Cambridge, it is a life sciences and information technology cluster. In other parts of the country, where it is advanced materials and manufacturing, it will be other kinds of skills. Figuring out how the system can respond to those very local, granular needs is part of the puzzle as well. I completely agree with you about investing in the people, as well as in equipment and buildings.
Q66 Anne Marie Morris: Your answer indicates that you are assuming that most of those people could or should be trained through a state-run system. Where there is an employer who wants to and can run their own training, should there not be some sort of appropriate support, incentive or tax relief?
Professor Coyle: I do not mind if it is state run or privately run. It will probably be a bit of both. No employer would expect to take somebody out of a further education college fully baked for the job. There will have to be some on-the-job learning as well. Certainly, having a stable, predictable scheme for employers to encourage them to do that is a good idea.
Q67 Anne Marie Morris: Paul, I think you said rightly that Budgets are really about tax, but they are one of the levers—although not the only one—to try to sort out the issues of our economy. Interestingly, in every Budget I have sat through, there have always been extra bits, because most Chancellors take it as an opportunity to look more broadly.
Did you have any thoughts about what was being said about life sciences, the changes to MHRA, the idea of trying to ensure that there will be mutual recognition for approvals—although I think that could be challenging—whether that is MHRA to EMA or vice versa? What did you think of the steps? Did you think they were right, appropriate and helpful? Would you have liked to have seen something similar for any other particular industry sector?
Paul Johnson: I will be absolutely honest: I am not the right person to answer that question. I will duck that entirely, sorry.
Anne Marie Morris: Diane.
Professor Coyle: I have not thought about it, either, I have to say. Obviously, the lack of mutual recognition is a bit of a barrier, but I have no idea about what the prospects are. You clearly know more about it than I do.
Q68 Anne Marie Morris: Torsten, let’s look at the principle then, if we do not have the life sciences expertise to answer the last question. I understand that there are all sorts of things that you could all be experts in, but you can’t be experts in all of them. What do you think Chancellors ought to do when they are trying to create the right economic climate for businesses and individuals? What do you think is appropriate, as opposed to straightforward tax rules and regulations?
Torsten Bell: I definitely do not feel qualified to talk in any detail about life sciences. Stepping back, the lesson that comes from some of what the Chancellor said last week about that sector is that what the country is wrestling with is that our home market is smaller than it was. We have gone from the single market for lots of different reasons; let’s not get into whether that is a good or a bad thing, but it does change what the optimal economic strategy looks like. Globalisation in general has tended to reward large home markets, for a whole host of reasons around whether you can get to efficient scale to produce.
With lots of what you are talking about, I feel like we are beating around the bush about changes we want to see to this or that sector, when really what we are asking is “How do we adjust to the world when we do not have a large home market?” That is definitely what is going on with your car industry right now. We have changed the size of the home market at exactly the same time as the car industry happens to be rejigging all its supply chains for an electric vehicle future. In life sciences, that is one of the reasons why you would prefer to have some level of equivalence for your regulatory approvals—not least because it will also help some other challenges.
The Chancellor mentioned that he was going to come back in the autumn to talk about his response to President Biden’s Inflation Reduction Act, and particularly the green subsidies that are contained in that. I hear one load of people—mainly the Labour party—saying, “We need to do exactly our version of that.” I see another load of people saying, “We’d rather all this protectionism wasn’t happening, particularly if the Yanks are doing it, because they are quite big and they have got quite a lot of money.” The underlying issue we need to wrestle with is that those things are happening, which means, all being equal, less free trade in the sectors that are affected. Lots of people are focusing on them as the industries of the future; I would add, in brackets, that it is not all of them, but it is the fashionable ones.
We need to step back and ask, “Where, given our small home market, are we likely to be able to have some comparative advantage?” That could be in wind; we might have a small home market, but we have a lot of wind. That could also be industries where the economies of scale are less significant, or where the barriers to trade are not binding. Rather than just asking whether Brexit was a good or bad thing, that is how we strategically step back and ask, “How does Britain’s economic strategy change after Brexit?”
I will give another example. Some service sectors are very regulated, such as financial and legal services. Over time, the EU can decide whether it wants to give us access to those markets. But there are other sectors that are far less regulated. You might want to change the balance of your economic strategy between the heavily regulated and the less well regulated, high value-added services, such as advertising or research. Do you see what I mean? This is me ducking your question of what should happen to life sciences, and instead broadening it out to think about Britain.
Anne Marie Morris: That was very helpful.
Q69 Dame Andrea Leadsom: Good morning. I will start with a very open question. You have all just said that you are not specialists in life sciences. I am not looking for a particular answer, but do you all think that it is right that people who can work should work? Is it right that a Government of any political persuasion should provide incentives and help people into work? Can I ask you to say yes or no? I know that is difficult, but I would love to know what direction of travel there is. Tony—yes, or no?
Tony Wilson: Can I answer with a sentence?
Dame Andrea Leadsom: I’d really like yes or no, and then you can explain.
Tony Wilson: Can work and claiming unemployment-related benefits—yes. But somebody who is retired, no; I do not think we should be forcing people who have retired back to work.
Dame Andrea Leadsom: I am not talking about forcing; you see, that in itself tells me something. Diane, do you think yes or no?
Professor Coyle: I will go for yes.
Dame Andrea Leadsom: Paul?
Paul Johnson: To be honest, yes for some people and no for others.
Dame Andrea Leadsom: Okay, so on the fence. Torsten?
Torsten Bell: I am pro a higher employment rate, yes.
Q70 Dame Andrea Leadsom: It is really interesting. In all the Budgets over the last 12 or 13 years, very clearly you have seen a determination to help people get into work on the values basis that if you are in work, it gets you out of the house. I have lots of constituents who come to see me and say, “I feel like I’m just on the scrapheap. I can’t get a job. I’m over 50 and a woman,” or, “I’ve got a disability.”
Politicians sometimes accuse economists of groupthink, but it seems very important that there is some kind of view taken about whether work is an honourable thing or whether it isn’t. We talk a lot about how we need to soak the rich and how the poor mustn’t be forced—to use your terminology, Tony—into work; and that if you are a pensioner, you mustn’t be forced into work.
That takes me on to the area of questioning I want to cover, which is childcare. That is obviously a very contentious area. My next question for each of you is: should every new parent with a child of nine months go back to work if they want to and can? Torsten, yes or no?
Torsten Bell: I think that is actually a good question, and it hasn’t been discussed at all since last week.
Dame Andrea Leadsom: It hasn’t, no.
Torsten Bell: What the Chancellor is actually saying—although he didn’t say it—is: “I want to change the social norm in this country so that more people work from when their child is nine months or a year, rather than the norm, which was historically nearer five years and has come down to about three.” That is basically what he said.
Q71 Dame Andrea Leadsom: Let me just interrupt you, because you do give very long answers. In your opinion, is that a good thing for the future success of the economy, and for the nurturing and socialisation of children? I know it is not an economic thing, but in your opinion, is it a good thing?
Torsten Bell: That is definitely not an economic thing. From our perspective, the higher employment rates that that drives raise living standards, and probably over time bring down the gender pay gap and other inequalities, and allow people to make more of their talents. Yes, I am generally in favour it—
Dame Andrea Leadsom: And what does it do for children?
Torsten Bell—but that is a narrow perspective because there are other things to consider. We don’t work on those areas.
Dame Andrea Leadsom: So you are basically batting it away.
Torsten Bell: No, I’m being honest with you. I’m not batting it away; I’m just telling you I’m uncomfortable—
Q72 Dame Andrea Leadsom: Tony, would you offer a view on childcare policy?
Tony Wilson: I think for most people most of the time, going back to work when their children are little is a good thing.
Dame Andrea Leadsom: How old?
Tony Wilson: For most people most of the time, it is a good thing to be going back to work even when their child might only be a year old or two years old.
Q73 Dame Andrea Leadsom: Nine months old. That is the policy. That is what we are talking about here. When the child is nine months old, is it good for the economy if both parents go back to work, bearing in mind that that nine-month-old will become, in 18 years’ time or 16 years’ time, the worker of the future. Is that a good thing?
Tony Wilson: Let’s be clear: that isn’t the policy. The policy on childcare is that you will have it available to you from nine months. The policy on conditionality, which is where the social judgment comes in, isn’t to bring it down to nine months, so that is not accurate.
Q74 Dame Andrea Leadsom: Well, okay, that is a fair point, but I am asking for an opinion, not for an assertion of policy. What is your opinion, Tony, as an economist, about the future in 18 years for all those children, who will be the people paying our pensions? Will they be better supported or less well supported? If you don’t want to answer that because you don’t have an opinion, should economists have a view on the potential long-term outcome? You have said that the Government needs to look at the long term. Should you have a view on whether those 18-year-olds will be better or worse off as a result of their parents being enabled, not forced, to go to work when they are nine months old? What do you think?
Tony Wilson: As opposed to going to work when their parents are two or three years old—
Dame Andrea Leadsom: Not when their parents are two or three years old.
Tony Wilson: Sorry, as opposed to their parents going to work when they are two or three years old. I am not sure we could say whether it is any better or worse in the long run for those children. In the short run, for the economy, it depends on the jobs that are being done. As Torsten says, if you have more people in work and higher employment rates, that is better for living standards and the economy. It is usually better for households too. Whether it is better for a child of 18 for their parents to have worked when they were one, two or three years old, I don’t think we can answer.
Q75 Dame Andrea Leadsom: Okay, so you don’t know. Should economists have a view on that?
Tony Wilson: I’m not an economist. I feel slightly like an imposter here.
Dame Andrea Leadsom: Okay, but you are allowed to have an opinion on whether economists should have a view on that.
Tony Wilson: I am allowed to have an opinion on it. On that particular point, I don’t think I need to have an opinion. What I am most focused on is whether the childcare measures enable people to go back into work.
Q76 Dame Andrea Leadsom: Yes, I realise what you are focused on. I’m asking you something different. I’m asking you whether the social and long-term consequences of specific policies should be something that people such as yourselves—economists and thinkers—
Torsten Bell: To be clear, lots of economists work on exactly those questions. You just happen not to have invited them this morning. A large number of very talented—particularly female, actually—economists have worked on exactly those questions: what kind of childcare provision will lead to long-term better education and social outcomes for children? That is true in the UK, and in the United States.
Professor Coyle: One thing I want to add is that caring for children is work, whether it is paid work or not. Talking about it through the lens of the economy—the monetary economy—is not the only perspective.
Q77 Dame Andrea Leadsom: That is a good point, Diane. Is there a world in which we can recognise that caring for children, whether your own or not, is an economic benefit to the economy? Should policy think more in the round about rewarding those who choose to stay home and look after their own children with a potential—but none of you has a view—benefit when those children are 18 and have an ability to contribute to the economy? Should such a childcare policy take into account in the round the value of everybody looking after children, whether their own or not?
Professor Coyle: I would put the value on optionality for parents of very young children, because the outcomes for the individual child in the long term will be very different depending on their family circumstances and what the other care arrangements might be, so it is quite difficult to generalise. Therefore, you want to leave the decision as much as possible to the individual household.
Q78 Dame Andrea Leadsom: Absolutely. Do you then agree that, potentially, looking in the round at childcare and bearing in mind that so many grandparents do childcare very informally, there would be some merit in a policy that considered—again, in the round—some form of value being placed on grandparents caring for children? The grandparents might be retired or semi-retired, and the parents more economically productive, so it would be a better trade for the economy as a whole.
Professor Coyle: It is certainly worth thinking about. One of the issues that I think Tony referred to earlier was the labour supply in the care sector. Thinking about a modest payment to grandparents instead might be a good alternative. There is a separate issue of not much more money being available, and it would have to be paid for, but it is well worth thinking about. Care structures are very varied.
Q79 Dame Andrea Leadsom: Absolutely. Paul, on this actual policy that has been announced, everyone assumes that it will take some time to roll out because of the supply-side reform that is needed. Have you at the IFS done any analysis of what actually needs to happen in the childcare sector? You have talked a lot about skills; we also know that that childcare budget is allowed only if someone is working, not if they are in training. Were I the mother of a nine-month-old and I wanted to train as a nursery worker, I could not get that free childcare while I train to resolve some of those supply-side issues. Has the IFS done any work on looking into that policy in detail?
Paul Johnson: A number of things are important here. One, as you identified, is that policy has changed dramatically in the past 20 years: from, first, providing very little in the way of childcare and, secondly, focusing on developing children from poorer backgrounds and giving them a better start in life, to what is now essentially a pro-work policy. That is how the policy has developed. It is an entirely new leg of the welfare state over the past 25 years or so.
On the evidence for outcomes for children, it is broadly not negative; for some things, it is positive, and for some less so, but for kids from poorer households, it is generally reasonably positive. It is not, however, a dramatic change.
A third thing is that the median payment on formal childcare by people with children under school age is zero. It is only a relatively small number who pay a lot, but for that group it has a big effect.
Fourthly, for mothers particularly, losing full-time work in the first few years of their child’s life is a huge long-term cost, which I suspect many do not appreciate. Taking time out or taking time to work part-time results in the very big gender pay gap that we end up with.
In the childcare market, the really difficult thing is that we are moving to a world in which we essentially have largely private sector providers, where the price will now be set in Whitehall for 80% of that market. If we get that price wrong, either we spend more than we need to, or it will just not work because we are not spending enough. That becomes much more important now that we have this under-three offer in the sector, which will have a significant effect. Those are the key questions.
The last one—and it is an important point—is that this is a new bit of the welfare state. We are moving stuff that was the responsibility of the family to something where the family has a choice and hands it over with subsidy from the state for the very good reasons associated with the long-term personal, social and economic cost of women spending time out of the labour market.
Q80 Dame Andrea Leadsom: I have one more question. Would it be a more effective, better value for money alternative to allow households to decide how they want to be taxed, rather than giving them free hours of childcare, to enable them to increase their spending power as a unit via other means than telling them what they can spend it on? Diane, do you have a view on that?
Professor Coyle: I was going to turn to one of the tax experts to have a view on that.
Torsten Bell: Do you mean household taxation rather than individual-level taxation among a wider change?
Dame Andrea Leadsom: If it was household taxation, it would have to be opted into and then out of by both partners, so it would be extraordinarily difficult to achieve.
Torsten Bell: That would be hard to achieve. Countries have done that over time. We have done it in the past. It is a very large question. There are some advantages; some poorer households would do better for the reasons you are generally getting at, which is people making the choice not to work. Other people have very different views about what means for gender equality, which I will not go into, but they are very significant, particularly if people cannot move quickly in and out of those arrangements; you are binding them into their relationships in quite a complicated way. I worry that you would significantly reduce the work incentives of second earners by moving into that world. That, historically, has had a big effect on employment rates and would reinforce some of the things that Paul has mentioned about longer-term different trajectories for what is historically men and women. It might not always have to be that way; there might be wider social changes. It is a very big change.
In terms of whether there are other areas outside the tax system, you have raised one of them, which is how we support childcare costs, maybe irrespective of whether people use formal childcare or decide to do it themselves; the grandparents discussion comes up a lot in that context. That is a very large extension of the state, so I will be liberal enough to think you should be careful. That would be very expensive. You would bring a lot of informal childcare into the semi-formal sector at very large expense. People proposing that should definitely be happy with putting up taxes.
Paul Johnson: I may be wrong, but I thought you were asking a slightly different question, which was: if we are going to spend 5 billion quid on families with children under three, should we not just divide it up and give them the money to decide what to do with it?
Dame Andrea Leadsom: Essentially, yes; I am not particularly prescribing how you would do it. I hear what Torsten is saying. Do you have other thoughts?
Paul Johnson: Therein lies the big social policy question. One thing we should note is that increasing numbers of families are not getting any child benefit now because that is being taken between £50,000 and £60,000, so in terms of universal support for children, we are not giving that. It is a higher end of it, but at the £100,000 mark, there is a very sharp cliff edge, so you can earn another £30,000 or even £40,000 and be better off—for some people, this will have a much bigger effect than the pension tax change that we were talking about. Actually, you are better off on £99,000 than on £130,000 if you are paying average childcare costs for two under-three-year-olds.
Q81 Dame Andrea Leadsom: Do you have any solutions? We have all seen the analysis.
Paul Johnson: Is this supposed to be a universal thing or not? You could make it universal. You could taper it. Obviously, you are not going to get too many people being that worried about those who are on over £100,000, but we are getting close to the point where we have as many people there as we used to have who are higher rate taxpayers, so it is becoming a more important thing where you have 62% tax and 45% tax and you are losing the childcare element. You have the increase in the value of the pension allowance. We need to spend a little bit more time looking at that group, and particularly the £50,000 to £60,000 group, where that child benefit is being taken.
Chair: I can assure you that we will be looking more at cliff edges in the benefit and tax system as the year goes by. It was very interesting to hear your initial take on some of the questions that Dame Andrea raised. You mentioned that other economists have done good work on that. I would be grateful if you could flag those to our Committee experts. Given that we are about to have Treasury questions, we are going to draw this session to a close. Thank you very much for your time and evidence this morning.