Immigration is good for tax receipts – and five other things we learned from the budget | Budget 2024 (spring)

Economic growth… relies on employees being more effective

The Office for Budget Responsibility (OBR) looks ahead five years in its forecast of economic growth and the public finances to help the chancellor judge what he can afford. Analysis to accompany the spring budget by the OBR claims productivity, as measured by the output per worker per hour, will increase significantly between now and 2029, despite being almost flat for the last 15 years.

Not everyone shares the OBR’s optimism. The Bank of England agrees that productivity drives the economy, increasing output and wages, but disagrees that the UK has the capacity to improve productivity over the next few years.

Economists at the investment bank Citi said the more pessimistic outlook was more likely and meant the chancellor will have a £35bn hole in his calculations from lost tax receipts by 2029.

Immigration… is good for tax receipts

Last year saw a huge rise in migration to the UK’s shores as foreign students returned to take up university places after a long Covid-induced break, pushing the net figure above 650,000. Net migration is estimated to settle at 315,000 a year in 2027, the OBR said last week. This is a much higher figure than the 245,000 forecast last November.

Higher net migration generates higher growth and tax receipts, to the tune of £7.5bn by 2028-29, says the OBR.

Hunt kept this money to pay for tax cuts when he could have set aside £2.5bn to provide migrants with health and education services.

Tax cuts… can generate higher receipts, but not always

George Osborne was a fan of the Laffer curve, which claims to show there is a sweet spot when looking to maximise tax receipts. The former chancellor lowered corporation tax receipts and claimed the outcome was clear – it generated more income.

Jeremy Hunt is also a proponent of Arthur Laffer’s theory and said the OBR agreed with him when he said a lowering of the capital gains tax rate paid on residential property sales would generate a higher income for the Treasury.

While taxes can influence behaviour, there is little evidence that these kinds of measures have a lasting impact. For instance, Hunt has increased corporation tax and contrary to Osborne’s analysis, expects higher receipts. And the OBR expects the 4p cut to national insurance since January to cost about £21bn with only a small benefit from higher numbers of people working (encouraged to get a job or work longer hours by lower taxes).

Workers with health problems… are on the rise again

The OBR said a post-pandemic rise in the number of people of working age out of the workforce is likely to prove more persistent than it previously thought. “The number of inactive working-age adults is no longer declining from its post-pandemic peak and has instead rebounded to 9.3 million,” it said.

“This keeps it around its highest level in over a decade and 700,000 more than before the pandemic. Around one third of the working-age inactive population cite long-term illness as their principal reason for not being in the labour force.”

Health professionals have argued that more investment in primary care, mental health and GP services would have a positive impact and allow many workers to return to the labour market.

The OBR said the loss of so many workers would depress GDP and tax receipts, offsetting all the gains from higher net migration.

Pensioners… no longer the target audience

Jeremy Hunt has aimed his tax cuts at working age people. He has achieved this by cutting national insurance, which people over the state pension age don’t pay.

Like everyone who pays income tax, pensioners are on course to lose out from a freeze on thresholds lasting until 2028 – which has the effect of making more of their income taxable – but without any mechanism to mitigate this cost, like a cut in national insurance.

However, retirees will enjoy a 8.5% rise in the state pension in April, which is a pay rise well in excess of anything workers are likely to receive. They also don’t pay national insurance, with is another huge pay rise for those that continue working beyond 65.

Public services… will be reduced

The OBR says it is implausible that public sector cuts implied by the chancellor’s budget figures can be implemented. Most economists agree.

Hunt saved the health service from suffering an inflation-linked cut in its budget after he promised a £3.5bn top-up to day-to-day spending and moved some cash around to give more for NHS capital spending. Defence, schools and international aid also have a degree of protection in an overall budget.

It means these protected areas will steal the extra money dedicated for public services – a 1% rise above inflation over the next five years.

There will be nothing left for unprotected sections of Whitehall, leaving the justice department, universities, the home office, business department and transport to make real terms cuts.