June 2024 | Fair Point | abrdn Financial Fairness Trust Newsletter

27 June 2024

Election special (part 2)

Now I’m not saying we have a crystal ball at the Trust, but we did run an ‘election special’ version of the newsletter in April. In normal times, that might have meant we had little else to say. But when you partner with The IFS there is no such thing as ‘normal times’ or a quiet patch in the run up to an election. Readers may have seen researchers from the IFS popping up on the news giving their verdicts on everything from child benefit to NHS waiting lists. They are drilling down into the manifestoes and essentially their message has been the same for all of them; the parties are not being honest with the electorate about public finances.

In terms of financial fairness, the IFS have crunched the numbers on various topics, summaries of five major reports are below. The rest can be found on the IFS website.

How have the size and shape of the UK state changed?

For a remarkably long time, the UK state remained at around the same size. Government spending outside of economic crises hovered around 40% of national income between the mid-1950s and the COVID-19 pandemic. This has been in spite of large, epochal changes to what the state does. Persistent rises in spending on social security benefits, state pensions and health and social care through this period were largely offset by a large reduction in spending on defence and a more recent fall in debt interest spending.

Since 2019, the size of the state has grown considerably, not only reaching historic heights during the pandemic but lingering at a higher level thereafter. It seems unlikely – though not impossible – that we will return to the size of the state that we had been used to seeing pre-pandemic, at least without cutting the scope of what the state provides.

In this piece, the IFS seeks to answer three key questions. First, how did the size of the state remain so constant for so long between the Second World War and the COVID-19 pandemic? Second, what has happened to the size of the state over the 2019–24 parliament, and why? Third, what can these developments tell us about the future, and the choices faced by both main parties?
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Seven key facts about UK living standards

Weak income growth - it has been with us since the Great Recession. Much of this poor growth has been replicated in other countries as the world has had to cope with the fallout from the financial crisis, COVID, and energy price rises. Even so, the UK has been falling behind most other countries, including since 2019.

This report sets out seven key facts that summarise trends in households’ living standards. The authors focus on the trends since 2009–10 (the last year of the last Labour government) and over the course of this parliament (since 2019–20).
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How do Labour’s commitments on policies for children stack up?

The Labour party have pledged to offer free breakfast clubs for all primary school aged children, the IFS looks at possible benefits and challenges with the policy. Labour have also announced plans to build childcare spaces in schools, the IFS gives their verdict on how effective the policy might be.

The government’s record on tax 2010–24

This report gives a high-level overview of tax policy across the period 2010 to 2024.

There are some clear distinctions between the governments before 2019 (including the coalition government of 2010–15) and the governments from 2019. Most notably, tax revenue as a share of national income was remarkably stable until 2019 but has increased sharply since and is now higher than at any point since 1948. There were also big swings in the direction of some major policies. The income tax personal allowance was increased for years before 2019 but is now on a declining path. The main rate of corporation tax was cut substantially until 2017 and then increased sharply in 2023. Rates of National Insurance contributions (NICs) continued their long-run upward trend until recently but have now been sharply reduced.

But there are also some common themes across the 14-year period. Overall, there has been a common trend towards increasing direct taxes on high-income individuals, while cutting them on low and middle earners. In fact, remarkably, despite the overall tax burden reaching historical highs, income tax and employee NICs now take a smaller fraction of the earnings of a single full-time median earner with no children than at any time for almost 50 years. Tax policy has been changed such that we are raising less on average earnings but more from higher earners, more from other taxes, and more overall.

Another common theme has been a move towards greater complexity. We have seen more than a dozen new taxes introduced since 2010, and many new rates and reliefs added to existing taxes. The tax code has never been longer. In general, this added complexity has not resulted in a tax system that is fairer or more economically efficient. In fact, despite all of the policy change, none of the major tax policy challenges that existed in 2010 have been substantively addressed. That is not to say that there have been no positive developments in tax design – there have been some welcome improvements in some areas. But these have tended to be small relative to the scale of the underlying challenges. Successive governments have missed opportunities to address poor tax design head on. Many of the tax policy challenges that were known about in 2010, including around how tax will adapt to addressing climate change, are now more urgent.
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The distributional impact of tax and benefit reforms since 2010

The past 14 years have witnessed an enormous amount of reform to the tax and benefit system. While it is tempting for politicians to draw attention to one set of reforms or another, what matters for household incomes is the whole system. In this report, the IFS studies the impact of policy changes to direct taxes (income tax, National Insurance contributions and council tax), indirect taxes (VAT, duties) and welfare benefits. Researchers examine reforms implemented since 2010–11, as well as those that have been announced and (on current plans) will be implemented by 2027–28. As well as highlighting how these reforms have affected richer and poorer households, those of different ages, and different family types, we draw out some key themes that have emerged – intentionally or otherwise – from successive Chancellor’s decisions. Whoever forms the next government, it is this tax and benefit system that they will inherit and which departures from will be measured against.
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