By Professor Donald Hirsch, Policy Adviser to the Trust
For a Budget that two months ago was being billed as a non-event, this one made some pretty major changes, especially to childcare and disability benefits. The focus has been on improving these two areas to enable more participation in the labour market.
But what does the Budget tell us about how the Sunak-Hunt regime is managing competing demands for help, across the income spectrum, in response to high inflation, low income growth and hence falling household living standards? As I noted after the Autumn Statement, there is clearly an improved commitment to protecting the most vulnerable in tough times, in terms not seen for over a decade – with most benefit levels as well as the National Living Wage being raised by 10% to reflect inflation, even as other wages increase more slowly. The fact that even the benefit cap, one of the key emblems of 2010s retrenchment, is being uprated with inflation for the first time, tells us a lot. So does the heavy emphasis on giving additional tailored support to help disadvantaged people succeed in the labour market. True, the mood music still includes an accompanying harmony emphasising tough benefit conditionality, through strengthened sanctions for those not meeting work conditions (despite a lack of evidence that today’s unprecedentedly tough sanctions regime is improving work outcomes). But this insistence on effective conditionality has been part of the message since the New Labour government and earlier.
At the other end of the income spectrum, critics rightly point to a handout that will only benefit some of the highest earners; allowing them to put more money into their pensions, and claim back income tax at the high marginal rates that they pay. Given the flexibility to draw down pension pots when you please in later life and the potential to pass them on to heirs free of inheritance tax, this will be a possible vehicle for rich people to hang onto more of their money. But this is small stuff compared to last September’s aborted proposal to abolish the highest rate of tax altogether. And with corporation tax rising, nobody is accusing the present Chancellor of spreading largesse among his rich friends.
But some of the most significant changes announced in the Autumn Statement and the Budget affect people not at the very top or the very bottom of the income distribution, but closer to the middle. Many households with modest incomes have been struggling to pay bills as their real incomes fall, and will find this harder from April, when the cost-of-living support will be paid only to those on means-tested benefits like Universal Credit. This creates a “cliff edge” whereby someone with just too much income to qualify for UC loses the £900 a year being paid to its recipients. This raises the question of whether in future a renewed emphasis on income-targeted support may leave people with modest but not very low incomes high and dry.
Yet the centrepiece of social provision in this Budget, the changes to childcare, suggest the opposite: it is not primarily income-targeted. About £150m will be spent on some helpful improvements to support for childcare through Universal Credit, which is indeed means-tested. But over 30 times that amount, over £5 billion a year when fully rolled out, has been allocated to improving the free early years entitlement, eventually giving 30 hours a week to all pre-school children above 9 months old and starting to reverse the underfunding of this offer which has undermined supply.
This substantial extension of subsidised childcare is not targeted on low-income families: only the richest 4% earning above £100k are excluded. Indeed, it is likely to be of greatest help to people near the middle of the income distribution – or at least those able to access jobs that would bring them to this income level if only childcare were affordable. In practice, workers on the lowest incomes rarely use paid childcare, with only one in fourteen Universal Credit claimants with children doing so. The government’s offer to start paying fees up front in UC may help to shift this, but families in working poverty are typically those with insecure and sometimes intermittent work, commonly made possible only through informal childcare arrangements with extended family and friends.
Consequently, the soaring cost and limited supply of childcare has had the most direct effects on people with more stable and reasonable but not high-paying jobs, where working has simply become unaffordable when children are too young to qualify for any free hours. At best, the current changes will transform the options of parents with young children, giving them similar choices of going out to work, at least part time, if they have preschool children as they do when they are at school.
For this to happen, it is not enough for new entitlements to be announced: we also need to see a systematic improvement in the supply of childcare places at which these entitlements can be redeemed. Sadly, decades of improvements to childcare access through demand-side subsidies have been persistently undermined by rising costs and shrinking supply. A recent report from Onward funded by aFFT suggests one route to supply improvement, through subsidies to agencies tasked with attracting more people to childcare as a profession. A bolder step would be to accept that government is now heavily invested in making childcare work, and should work directly on securing supply. A National Childcare Service may once have seemed a pipedream, but this Budget may have brought it one step closer.
Overall, then, the emphasis on targeting, to the most needy, some forms of emergency help to mitigate the cost of living crisis cannot be read across to a disengagement by government from interventions that will help a wider group. Indeed, the vital roles played by the state during the pandemic appears to have strengthened the case for wide-ranging state support, influencing views across the political spectrum. Five years ago, it would have been hard to imagine a government having taken on a large amount of extra debt, but still willing to spend new billions extending its role to a new area of social entitlement (free childcare hours for the youngest children). It remains to be seen whether, five years from now, this thinking will have become entrenched, and possibly extended to new policy areas or to enhanced public spending levels, or whether fiscal strains will lead to renewed retrenchment.