Mass migration props up growth as worklessness crisis worsens
Hunt wants to get Britons back to work, but the UK is reliant on foreign labour to plug the gaps
AS HE stood at the dispatch box, Jeremy Hunt was clear. Unlimited migration would not solve Britain’s problems, he said, a bold statement by a Chancellor who wanted to present a picture of a growing economy, rising living standards and lower taxes in the final Budget before the election.
But official forecasts suggest that whatever the rhetoric, growth will be driven by a big jump in the population – and in net migration, with the total number of adults in the UK to rise from 55 million in 2023 to 57 million by the end of the decade.
This is a million more people than the Office for Budget Responsibility (OBR) predicted in November. Meanwhile, the worklessness crisis gripping the population who already live here is only going to get worse.
Jeremy Hunt claimed that economic growth would only lead to higher wages for every family in every corner of the country “by building a highwage, high-skill economy” and “not just higher GDP but higher GDP per head”. In one sense he was right. The population may be larger, but that rise will do very little to solve worklessness.
In a damning opening paragraph in its latest tax-and-spending forecast, the OBR said: “One of the biggest changes to our economy forecast is an increase in the size and growth of the UK population. But higher and rising levels of inactivity offset its impact on the overall size of the workforce.”
The combination of a larger population and declining workforce is the Chancellor’s biggest problem. Squeezed public spending will also add to pressure on schools and hospitals.
The Chancellor has staked his reputation on getting Britons back to work. He’s cut national insurance instead of income tax because he believes it will tackle inactivity. But the OBR said that even taking into account Hunt’s tax cuts, it expects the share of people in work to continue falling from its pre-pandemic peak of 64.3 per cent to 62.8 per cent by 2028.
This is half a percentage point below its November forecast. The reason? Economic inactivity may be on a permanently rising path. Rather than continuing to decline from its postpandemic peak, the number of inactive working-age adults has started climbing again to 9.3million. That’s 700,000 more than before the pandemic.
Richard Hughes, the chairman of the OBR, added: “Long-term illness is both the most common, and fastest growing, reason for being outside the labour force, accounting for one-in-three people in this group.
“These worrying trends suggest the overall labour participation rate is likely to continue to fall over the next five years, rather than making a partial recovery as we assumed in November.”
The OBR said: “With a larger population but lower labour participation, our forecast for potential output growth over the next five years is largely unchanged from November at around 1.7 per cent a year.
“Higher net migration, lower interest rates, and lower energy prices boost population growth, business investment, and productivity respectively. But the latest data on labour participation, demographic and other factors have led us to revise down the overall trend participation rate and average hours worked.
“The net effect of these changes leaves the level of output 0.1 per cent lower in 2028 than forecast in November, but 0.1 per cent higher after accounting for the policies in this Budget that boost labour supply.” In other words, a big rise in the population will hardly move the dial on growth.
Long-term sickness now accounts for around 30 per cent of the inactive population, according to the OBR – about 130,000 more people than previously estimated. Spending on disability benefits is expected to keep rising and OBR has previously said one in eight working age Britons will be claiming disability benefits by 2028.
Higher migration erodes public services
Speculation was rife that Mr Hunt would eat further into future public spending to fund pre-election tax cuts.
But the Chancellor resisted the temptation and instead said he would keep a 1 per cent real terms increase for departmental spending from 20252026 onwards. However, higher net migration will pile more pressure on schools, hospitals and housing over the next five years.
The OBR’S latest forecast predicts net migration will average around 350,000 a year over the forecast period, up from 290,000 in its November forecast. “Cumulatively, this adds a further 350,000 people (around 300,000 adults) to the UK population over the next five years,” it said.
High net migration since the pandemic and soaring inflation mean per-person spending on public services will be £630 lower than anticipated by 2026-27. The OBR estimates that some £160 of that fall is driven by more immigrants coming to the UK to fill labour shortages, accompany family or flee persecution.
The budgets for each department from 2025-2026 onwards will only be set out in the next spending review, creating a bind for Labour if it wins the next election. Rachel Reeves, the shadow chancellor, will likely be forced to pick which areas of public services will prove winners and losers.
Economists have already warned that as spending on things like health, education and defence are protected, this leaves “implausible” cuts amounting to nearly £20 billion across unprotected areas. Without top-ups, the justice system – already riddled with backlogs – will face further real terms cuts, as will local governments despite a growing number already declaring themselves bankrupt.
The OBR warned that there was a “significant risk” that ministers will be forced to top up spending for unprotected departments. It highlighted that governments over the past two and a half decades have on average increased spending by 1.1 per cent when faced with reviews. Most recently in 2015 and 2021, Conservative chancellors confronted with tough choices found an extra £39billion and £32billion per year respectively.
Sunak’s stealth tax raid
The latest economic forecasts by the fiscal watchdog lay bare the impact of Rishi Sunak’s stealth tax rise.
As Chancellor, Mr Sunak froze the brackets determining the rate of income tax from April 2022. Private sector wages have risen by more than 10 per cent in the past two years.
The OBR said the tax-free allowance on work was lifted in line with inflation, the personal allowance would have reached £16,310 by the end of decade. As things stand, it is estimated to rise to just over £12,800.
The freeze will be in place almost until the end of the 2020s under current plans, creating millions of new taxpayers as higher nominal pay tips
‘Migrants will be using public services ... but that doesn’t increase public spending’
them over the threshold.
The OBR’S analysis shows that fiscal drag will mean 3.7 million people will start paying income tax as their income rises above £12,570 a year. Close to 3 million workers will also be dragged onto the higher rate of 40 per cent as their earnings rise above £50,270. And 600,000 taxpayers will start paying the additional tax rate of 45 per cent as their income surpasses £125,140 a year. The OBR had initially said in November only 400,000 more people would be hit with the highest tax rate, but it has revised up its projection by 200,000.
Even as Mr Hunt doubled down on his “back to work” push, the OBR warned that the frozen thresholds were discouraging the affected taxpayers from working more. The greatest disincentives were felt by some 7 million workers having to pay income tax or being taken into a new bracket.
OBR officials expect the cuts to National Insurance to bring the equivalent of 200,000 more people into the workforce. However, the OBR said that if income tax thresholds had not been frozen for six years, the increase would have been 300,000.
Record high tax burden narrowly avoided
Mr Hunt has narrowly avoided putting the UK on a path to having the highest tax burden on record after cutting National Insurance from 10 per cent to 8 per cent.
Under the latest forecasts the tax burden will hit 37.1 per cent in 2028-29, the highest since 1948 when it was 37.2 per cent. It means the tax cuts announced yesterday will save the Chancellor from embarrassing headlines of putting the UK’S tax burden on course for a peacetime high of 37.7 per cent as predicted in November. Even so, the tax cut that will benefit 27 million workers will be insufficient to reverse the blow from frozen tax thresholds.
Paul Johnson from the Institute of Fiscal Studies’ verdict was blunt. “This remains a parliament of record tax rises,” he said. Torsten Bell from the Resolution Foundation, a think tank, highlighted that fiscal drag raises taxes by nearly twice as much as the national insurance rate cuts reduce them. The OBR also noted that this means the tax cuts reverse only half of the impact on the personal tax burden by 2028-29.
In addition to freezing income tax thresholds, the Government also lowered the top rate for high earners from £150,000 to £125,140. The tax burden has risen from 33.1 per cent to 37.1 per cent since the start of the current parliament. Mr Hunt claimed that the average earner in the UK now has the lowest effective personal tax rate since 1975. OBR chairman Mr Hughes said there were two reasons why Mr Hunt’s claim was correct – and neither was due to tax cuts.
The first was that higher earners were now seeing “more and more of the personal tax burden” concentrated amongst them. Tax receipts are now “concentrated more at the top end and that’s also where you’ve seen quite a lot of the earnings growth in recent years,” Mr Hughes added. He also said the tax system was now more “rebalanced” away from personal taxation, to indirect taxation. “So in particular, the advent of value added tax (VAT) as a major source of government revenue has allowed the Government to shift the tax burden away from taxes on income towards taxing you where you consume”.
VAT revenues are expected to hit £200billion by the end of the decade. “That probably explains how you can have both a lower average personal tax burden but a higher overall tax burden at the same time,” he said.
Stabilising the tax burden will require another pre-election bonanza, according to the OBR, which calculated that tax revenues would have to be £34.3billion lower in 2028-29 to keep the burden at current levels.
Recession already over
The good news for Mr Sunak and Mr Hunt is that the economy is believed to be already out of recession after shrinking in the second half of 2023.
The OBR predicts the economy will grow by 0.2 per cent in the first three months of 2024, helping it to expand by 0.8 per cent overall in 2024 as real incomes recover. This is slightly higher than November’s prediction of 0.7 per cent. Growth is expected to bounce back further in 2025 to 1.9 per cent and 2 per cent in 2026. Interest rates, meanwhile, are set to fall sharply in the coming years in a boost to millions of mortgage borrowers.
The Bank of England will cut its base rate from 5.25 per cent today to less than 4 per cent in a year’s time, the OBR predicts. Another year after that, rates will be closer to 3 per cent than 4 per cent, in a partial reversal of the rises which officials have imposed since 2021 as they battled the spike in inflation. This represents a major change of OBR forecasts. At the time of the November Autumn Statement, the official forecaster had thought interest rates would not fall back below 4 per cent.
Mr Hunt hailed the fact inflation was now expected to fall below the Bank of England’s 2 per cent target “in just a few months”, and continue falling to 1.1 per cent by the start of 2025, according to the latest OBR forecasts. It said this was driven by sustained “falls in global energy prices” which are predicted to push down energy bills further in the coming months. This is in contrast to the Bank of England which does not expect inflation to fall sustainably to the Bank’s target until the end of 2026
Unemployment is expected to peak at the end of this year at 1.6 million people as a faster fall in interest rates has less of a drag on growth.
Living standards recover while productivity lags
A faster than expected fall in inflation also means living standards will “recover more quickly” than in November, according to the OBR.
However, it highlighted that 2022-23 saw the largest year-on-year drop in living standards since records began in the 1950s owing to a surge in inflation following Russia’s invasion of Ukraine.
A faster fall means a speedier recovery, with real household disposable income per head now expected to recover to its pre-pandemic peak by 2025-26, two years earlier than in our November forecast. The OBR said cuts to national insurance in the Budget would boost household incomes by 0.5 per cent.
Mr Johnson said the OBR has got slightly less gloomy about household incomes – but they still won’t recover pre-pandemic levels until 2025. So no increase in incomes over the whole parliament. However, the rapid rise in immigration means that while GDP is growing, GDP per head is forecast to grow more slowly than previously expected amid a surge in immigration.
David Miles, an executive at the OBR, also warned that productivity growth remained “dismal by anybody’s standards over a long time”. He added: “Who knows whether the next five years will be as bad as the last 15 year.”
Debt falling... but only just
Tax cuts have eroded much of the Chancellor’s fiscal headroom. Mr Hunt will meet his main tax and spending goal to get public debt falling in five years time, but only just.
In November, the OBR forecast Mr Hunt would meet this target with headroom of £13billion. Now, the margin is at £8.9billion. “The reduction in headroom is mostly due to the impact of policy measures,” the OBR said.
Mr Hunt’s headroom is now just a third of the average set aside in any fiscal event since 2010. Excluding his March 2023 Budget, it is also the lowest had by any chancellor in this period.
The OBR warned it is a figure built on shaky ground. The calculation incorporates an extra £4.8 billion in tax revenue in 2028-29 from a planned rise in fuel duty. But this is unlikely to happen. Every chancellor at every fiscal event since 2011 has opted to postpone a planned increase in fuel duty. If the rise does not materialise, it will wipe out “almost all” of the headroom.
Big swings in borrowing costs pose another major risk. If effective interest rates on central government debt rises by just 0.3 percentage points above the OBR’S forecast, this would completely eliminate all of the headroom.
All in, the OBR said there is only a 54 per cent chance this target will be met.
House price falls to be limited
House prices will fall less than previously thought this year as a drop in mortgage rates boosts buyer demand. Prices are predicted to drop by 2.4 per cent in 2024-25, according to the OBR.
This will be less than half the 4.9 per cent fall it forecast back in November.
The tax and spending watchdog scaled back its expectations for price falls in the coming financial year because lenders have cut mortgage rates ahead of expected Bank of England rate cuts this summer.
A 2.4 per cent price drop will knock £6,840 off the average UK home, which was worth £285,000 in December, according to the Office for National Statistics (ONS).
Higher house prices, alongside expiring stamp duty thresholds, mean the Chancellor’s receipts from property transaction taxes will nearly double from £12.7billion in 2023-24 to £22.1billion in 2028-29, the OBR said.
‘Who knows whether the next five years will be as bad as the last 15 years’