In this episode, FAI Deputy Director João Sousa is joined by FAI Director Mairi Spowage and Senior KE Fellow Spencer Thompson to talk through their reactions to the 2025 UK Budget.

Episode notes

Participants

João Sousa

Mairi Spowage

Spencer Thompson

Timestamps

(0:30) Budget expectations, OBR leak, and response

(4:29) Lifting of the two-child limit on the child element of Universal Credit

(10:23) Clearing confusion around child benefit, two-child limit, and the benefit cap

(14:01) Freezing tax thresholds

(19:25) Smorgasbord of smaller taxes

(28:26) Spencer reflects on his first budget with the FAI

Transcript

João Sousa  0:07
Hello and welcome to the latest edition of the Fraser of Allander podcast. My name is João Sousa and I’m deputy director of the Institute and I’m joined today by Mairi Spowage – our director, and Spencer Thompson – one of our senior
fellows, good morning to you both.

Mairi Spowage   0:27
Morning.

Spencer Thompson   0:27
Morning.

João Sousa  0:30
So it’s the morning after the night before and we can all breathe. It’s the budget that seemed like it would never end. We’ve had endless briefing over the last three months that culminated in one final pre-budget leak. We still don’t know exactly what happened, but it seems that the OBR documents were able to be accessed well before the chancellor was due to speak at the Commons.

Mairi Spowage   0:55
Was it about 5 to 12 that it got released? Something like that.

João Sousa  1:00
Yeah, something like that. So yeah, it was not an ideal pre-budget situation. On the other hand, you know, there was actually very little to discover in those documents.

João Sousa  1:10
That we didn’t know already, which I guess is the theme of this budget. There was so much that was briefed out before that. We ended up being, I guess, a bit underwhelmed in terms of reaction. Just because we knew what was in it.

Mairi Spowage   1:30
Yeah. Absolutely. I mean, I think one of the ironies of this budget is really that the accidental publication, by probably some poor junior person at the OBR. You know, followed essentially very pretty official briefing probably by Treasury SPADs all the way in the run up to the budget, which confirmed everything pretty much that was in it. So, you know, I don’t know about you, but I felt like the kind of outrage by, you know, the Chancellor and the Treasury that the fact that this had happened, obviously it shouldn’t have happened.

It’s a serious thing that’s happened that the OBR has accidentally publish this. But it’s a bit galling given the briefing, you know, the very active briefing that had gone on confirming every single budget measure in the run up by the by the Treasury, which is like nothing we’ve ever seen before. So, let’s just bear that in mind that we knew everything that was in this document before it was accidentally released early.

João Sousa  2:39
Yeah, absolutely. In fact, if you’re going to pick one budget to accidentally pre-release, this would be the one that would have the least consequence. Really as you said, we pretty much knew everything because the Treasury made sure we did.
But we’ll try and come back to that at the end I think in terms of reflections on the process. But I’ll just run through the headlines quickly. So, there were big tax rises, about 26 billion. I think personal tax thresholds were frozen, which is by far what raised the most money. Then there was the so-called smorgasbord of smaller taxes. They were all increased by various degrees, some quite a few new taxes, quite a few others that that were just hiked quite a bit. Spending is up in the near term, with some kicking the can down the road in terms of some penciled in spending cuts which I guess follows previous chancellor behaviours. So, the buffer against the fiscal rules being broken is up formally to 22 billion, though we might come back to the fact that it’s actually been smaller than that because it requires some pretty strong assumptions. But one thing that that has been… one decision that has been taken and has been widely trailed and has been called for many, many years by many segments of our body politic is the scrapping of the two-child limit. Which was confirmed by the Chancellor and will have a significant impact. And I wonder, Spencer, if you could talk us through what exactly the Chancellor announced.

Spencer Thompson   4:29
Yeah. So, I thought it might be good to start with just a brief explanation of what the two-child limit is. Basically, under the two-child limit, families only receive the child element of Universal Credit for up to two children in the family. It’s been really widely criticised, particularly by anti-poverty campaigners. Besides being pretty patently cruel and judging by the evidence not really meeting any of its own objectives. Around kind of fertility decisions and work, work decisions it’s been pinpointed as kind of the single most damaging policy in terms of driving up child poverty rates across the UK. So, it really had to go in in a in a political sense, you know. It was introduced in 2017 under the then Conservative government. And you know, you have the Labour government come in, comes into power promises to reduce child poverty so it was really, I think, a matter of time. There was some speculation that she might, you know, delay the removal of the two-child limit or adopt some kind of half measure. But she has, she has now decided to remove it in full from next year, which will be a relief to many to many campaigners and of course many, many families and children. So, the projections that the government published alongside the budget do indicate that on this, thanks to this measure, they will meet their pledge of reducing child poverty. It’s a pretty slim margin, but against quite a difficult baseline. So yeah, we’re still waiting for the full child poverty strategy, but that’s that’s essentially what she’s done, done so far, yeah.

João Sousa  6:32
And is it fair to say that this is the main thing that’s been done on child poverty in this budget? Obviously, it’s a big thing, but you mentioned that the child poverty strategy is delayed and has been delayed for a while. And I guess this is not the only thing that you can do to reduce child poverty.

Spencer Thompson   6:57
Yeah, that’s right. And I mean, when Labour came into power, they set up this child poverty task force and we were due a strategy – a child poverty strategy in the spring, which was going to cover, you know, not just Social Security, certainly not just the two-child limit. But you know a whole range of different approaches to tackle what they refer to as kind of the root causes of child poverty. So, there’s been very little public information on that and you know the strategy was delayed from the spring to now basically and the latest document I saw said that it is official document said that it’s going to be published soon. So, depending on how you define soon I would expect it to be in the next month or so and it’ll be interesting to see what’s in there.

João Sousa  7:55
Yeah, as a Guns and Roses fan, I remember soon being something that was said about how long their album would take to release. So, I hope it’s not that definition of soon. Mairi, did you want to say something on this?

Mairi Spowage   8:11
Yeah, yeah, I thought a couple of things were interesting. I think, like the way it was presented and obviously during the speech, it was the thing that got people most kind of riled up in the Commons. To be honest, through most of the statement, the front bench looks pretty, pretty gloomy and the energy was pretty low for a budget speech, I thought. But, you know, this was the thing that got the backbenchers waving their order papers and really, you know, I guess feeling this was like a Labour thing to do. But I mean, one thing to say is, you know, she made a big case of the moral argument, including talking about the so-called “rape clause”. You know, if people had more children by non-consensual attack then you know you can make the case that you do get these but you know like and all this sort of quite awful stuff that you know it’s about the moral argument for the removal of the two child limit.
But we have to remember that she could have done it before and she didn’t do it before. She hasn’t done it till now and also it’s not being removed until April and it was possible to remove it, you know immediately given the way that the benefits administered, it isn’t like the Scottish Government’s. So, I mean we can come back to the impacts in Scotland, but it isn’t like the Scottish Government who actually had to sort of administratively, set up a way to actually do this and mitigate this. So you know we have to remember that you know as she’s sort of moralising about how this is a dreadful thing. You know they could have done it as soon as they came into office if they’d wanted to and they chose not to do it. The other thing that drives me a bit mad about this and it’ll be I’m sure for you Spencer as well, but people keep calling it the two-child cap, the two-child benefit cap when it’s nothing to do with child benefit. It’s a two-child limit on the child element of Universal Credit. Sorry to be wonky about it, but it just like it grates with me every time somebody says it.

Spencer Thompson   10:01
Yeah.

João Sousa  10:02
Yeah, but, but this is important because there is a benefit cap.

Mairi Spowage   10:10
Yes.

Spencer Thompson   10:10
That’s right, yeah.

João Sousa  10:10
Which does interact with this and actually the that has consequences for the Scottish Government’s money that they set aside, doesn’t it Spencer?

Spencer Thompson   10:23
Yeah, that’s right. I mean, just to dwell on that point a bit, because there is a lot of confusion around basically three different policies. The child benefit, which is something else entirely, then there’s the two-child limit, which is what was removed. And then there’s the benefit cap. Which is a distinct policy, as you say Mairi and very often, confusingly, the two-child limit is called the two-child benefit cap, which doesn’t help things, but the benefit cap limits the total amount of means tested benefits that a family can receive.
As it happens, and it sort of makes sense that the families with the largest benefit entitlements will tend to be the ones with lots of children. So, there is a strong overlap between the two. The two-child limit is a much bigger policy in that it affects much more households. But the overlap is really important in Scotland, as you say Joao, because we already have in place a commitment in Scotland to mitigate the benefit cap. So basically, without getting too wonky about it, I guess there are already a lot of families that are on essentially affected by both the two-child limit and the benefit cap. In the rest of the UK, they won’t actually benefit at all from the removal of the two-child limit because they’re already against the cap. You’ll also have a bunch more who move on to the benefit cap as a result, and so don’t benefit fully. In Scotland the kind of interesting bit is the benefit cap is mitigated through discretionary housing payments, so that incurs a cost to Scottish Government because they now have to mitigate a larger, you know, more people on the benefit cap, essentially. The other channel is with the two-child limit being removed. You have some households who are hovering kind of just above who have just too much income to be entitled to any Universal Credit. With the two child limit removed, they might be brought on to Universal Credit and therefore they might be eligible for Scottish benefits like the Scottish Child payment. So some kind of knock-on cost for the Scottish Government. Overall, a big saving from not having to mitigate the two-child limit but it’s a kind of complicated picture.

João Sousa  12:46
Yeah. Thank you, Spencer. That’s really interesting. It’s I think it’s really worthwhile making this distinction. I appreciate that that that you guys did say it was a bit wonky, but it is really important because it’s kind of these rough edges of the systems interacting with one another that that kind of get missed often in this discussion, I wonder if we could just move on to talking about tax because that was one of the big announcements of this and I mean by far freezing personal tax thresholds is the biggest revenue raiser. We won’t dwell on whether that meets the letter or the spirit of the manifesto commitment, but certainly it raises a lot of money and put together, if you put together all the threshold freezes since the beginning of the decade, it’s by far the biggest revenue raiser that we’ve had. I think as a continuous policy for many years. So Mairi what of this affects Scotland, if anything?

Mairi Spowage   14:01
Yeah. So as you say, it was by far the biggest single revenue raiser and it just, yeah, since this has this happened at the UK level, it’s just this enormous amounts of money this is raising and the reason it raises money is of course that as people’s salaries go up with inflation, which generally always happens. Or more than inflation, sometimes we would hope. People get brought into tax if the if the thresholds are frozen in cash terms, more people get brought into tax and more people. Crucially, I think from the revenue point of view, get brought into the higher bands of tax and pay a lot more tax. So, you know, we would say this is a tax increase on people. It’s just, but it’s just not an increase in the rate you pay, but you pay more tax than you would have otherwise if the thresholds had gone up with inflation. And that’s the kind of, you know, detail that that the politicians like to kind of miss on this.

João Sousa  14:42
Absolutely. Your average tax goes up, the tax rate goes up even if the marginal rate is unchanged.

Mairi Spowage   15:00
Yes, yes.
Exactly. People think of just, you know, well, I pay the basic rates. I pay 20% on the next pound I earn and if I if I live in in England but it’s yeah, it’s about how much what percentage of your overall pay do you pay in tax and that will go up with a policy like this over the years as your pay goes up.

João Sousa  15:23
And that’s what matters for how much you have at the end of the month, right?

Mairi Spowage   15:26
It is, it is what matters and that’s why it’s called a stealth tax because it does take more of your pay away and tax. But people just don’t notice it as much or aren’t as outraged by it as if they’d gone, you know, we’ll put up the basic rate to 21p or whatever. So it’s a complicated picture for Scotland because the UK Government do set the personal allowance. So that’s the, you know, around 12.5k that you can earn before you start paying tax at all. So, they do set that. So, the fact that that’s going to be frozen and cash terms will impact on Scottish taxpayers, but all of the other rates and bans are set by the Scottish Government. Now, of course, if the Scottish Government wanted to, they could introduce a no rate band, which essentially would mean that they could operate their personal allowance by inflation. But you know the behaviour of the Scottish Government in the past, you know, 5 to 10 years would suggest that they won’t do that because not only have we had the personal allowance frozen since the Sunak government started doing it, you know, a few years ago, we’ve also had the higher rate threshold in Scotland frozen for many more years than that. So that’s been frozen essentially since about 2018. So that’s much much lower than the UK higher rate threshold. So, you know say it’s the same administration as it’s been in the past in Scotland after May you know you know go looking at past performance would suggest that they’re less likely than the UK government to increase thresholds by inflation, but we’ll have to see, I mean some of the commentary on you know, well, you know, Shona, Robinson and the Scottish Government will have to decide what to do in response to this policy by Rachel Reeves. It’s not really right because what the Scottish Government are doing in January is setting the tax thresholds for next year. And none of this is relevant to next year. It’s all about those were frozen already. They were already frozen till 28/29 at the UK level. This is extended for a further so year, you know, so none of this is actually relevant because they have never told us what they’re going to do in years 2, 3, and 4 of the Scottish Government, they’re always only ever setting the policy for next year, so it’s not really relevant to what Shona Robinson does, apart from the fact that income tax rates weren’t increased immediately, which would have given them a big headache. As we’ve written about extensively on our blogs.

João Sousa  17:29

Yeah, yeah, yeah. There’s a there’s a small effect from something of that sort because the tax rate on property income has gone up by 2p for the higher rate and additional rate in England and Northern Ireland. Which you know the property income is much smaller as a proportion of overall income, but we think it might cost the Scottish Government about 60 million from 27/28 onwards, not from this year onwards.

Mairi Spowage   18:10
Yeah. So that that wouldn’t impact on this year’s budget that’s going to be set in January, but it is an interesting one where and again interesting about the interactions between the devolved and reserved tax systems that essentially the UK Government are creating a new category of income that they’re separating out from kind of “normal” employment and self-employment income called property income, and they want to tax at a different rate. So, this is going to, you know, need some interactions with both the Scottish and Welsh governments to understand what that means for the dual income tax system and the extent to which, say.. the Scottish or Welsh Governments might want to replicate this or something like that, so it’s an interesting one.

João Sousa  18:45
And some essentially weird consequences in terms of what we call tax motivating corporations and things like that. Yeah, I mean that’s the change is not massive, but it will be marginal for some people as to whether they want to change the way they distribute their earnings.

Mairi Spowage   19:05
Yeah absolutely. And I guess overall, like you know, we’re not getting to tax simplification here that already like extremely complicated, creaking, nobody would have started here, UK tax system is just having more complexity added to it rather than the simplification so.

João Sousa  19:25
Well, well, thanks for segueing into my next question, which is about this whole set of small taxes. And I think we don’t have time to go into all of them, do go and check out our blog. We’ve covered quite a few of these smaller taxes and what they might mean. And kind of we’ll do some more analysis today as well. But I guess a quick reflection, Mairi, on like how risky it is to rely on so many small changes, particularly if they’re kind of ill defined, which some of them seem to be.

Mairi Spowage   20:04
Yeah, absolutely. So, there would be a couple of examples which were kind of eye-catching, although compared to some of the kind of sort of sneakier things that people don’t understand as well, you know, things like salary sacrifice and all that sort of thing. Let’s not get into that. But you know, that raises a lot more money than any of these would.

João Sousa  20:22
Oh yeah, absolutely, yeah.

Mairi Spowage   20:23
But you know, there’s things like the so-called Mansion Tax, which is called the High Value Council Tax Surcharge or something like that in England’s.

João Sousa  20:32
Which is not Council tax.

Mairi Spowage   20:34
Which is not Council tax, essentially trying to look at revaluing a whole bunch of properties in England to then identify those that cost over 2,000,000 plus. And it’s a slab tax as well. So which means you get the rate charged on a whole bunch. Rather than it being sort of being marginal, so that’s not a good design either, but in in essence, they’re trying to identify very high value properties to charge a surcharge on it. They OBR of assumed that there’ll be lots of behavioural responses, including things like bunching under thresholds, which always happens with these sorts of things, so that is likely to happen, but they think it will raise about £400 million, but that is hugely uncertain. You know it’s a bit of a finger and the wind, to be honest, is sort of costing and that’s what the OBR are saying in their document. This is highly uncertain that, that, that it’s going to raise this sort of money. So, the sort of the mechanism for collecting this tax isn’t there. The tax base understanding of the tax base because evaluations haven’t been done yet, isn’t there. So, you know, relying on this, this income actually coming in, I think this is in a category of things that the consultation will happen. It’ll get kicked down the road and then eventually it’ll probably get quietly dropped because it’s just not going to be worth the hassle without revaluing whole property base, which we should do for Council tax, of course.

 This just seems like it’s going to be getting that category of probably not worth the money and the administration and the hassle that it’s going to be sort of, you know, in terms of the income that’s generated. Some are saying, oh well, once they have, you know once this tax base actually valued and defined that gives or opens up more opportunities for different sorts of taxation of the property base in the future, which is, which is an interesting argument, but it’s certainly not, it’s not likely to raise much money and it’s highly uncertain that it’ll raise any money.

 So that’s an example of an eye-catching headline grabbing measure which is very uncertain and in my view probably never going to happen.

João Sousa  22:54

And also I think there was some interesting analysis from the Resolution Foundation that that shows that it still doesn’t change the fact that a £5,000,000 property will still pay much less as a share of its value in tax than a band B property. That is, that will not change. I mean it will be the gap will be slightly closed.

Mairi Spowage   23:16
I mean, this is why, like this conversation about wealth taxation in general, but property taxation in particular is so infuriating. Like, you know, have the eye-catching measure, which doesn’t really deal with any of the underlying issues with Council tax, doesn’t really raise any money. But you can sort of, again throw this as red meat to your backbenchers to say that you’re targeting wealthy individuals – just reform Council tax properly. You know, you know, grasp that nettle and do it instead of like, these sorts of things.

João Sousa  23:40
This really kind of comes back to the fact that and kind of this moves on is on to talking about like the process of whole and the budget and how it was kind of put together and it kind of reminds me of something that I saw the other day which was a Dennis Healy quote, not someone necessarily associated being extremely on the right. Saying that, it would be nice if we could just target people who had very, very high incomes for everything and raise all revenue there, but there just isn’t enough income there to fund everything. And I think that is a reflection of some of some of these measures, you know, even the biggest revenue raiser is from paid by most people and there’s been kind of pretending that that it is just targeting people at the top end, when really, you know, just even though it’s, it’s difficult to comprehend sometimes when you just look at one person’s income, but the government just collects so much money as a whole. Even the wealthiest person that you can think of would not be able to sustain the government for that much that much time. You know, Elon Musk is about to be paid 1 trillion which will not be his whole, you know, his wealth is very, very high, but the government spends that, you know, every year.

Mairi Spowage   25:34
Yeah, yeah, absolutely. And yeah, yeah, absolutely. You know, for a taxation to be sustainable, most people need to pay something. And the other, the other tax measure, which is, is again quite eye-catching and a sign of things to come. Perhaps it’s the charge for electric vehicles. The mileage, the proposed mileage charge. Then again, it’s not particularly clear how that’s going to work. And it’s supposed to come in in a few years’ time, but essentially, it’ll be a charge for per mile that you drive, you know. So, instead of with petrol cars we pay fuel duty on the fuel we put in our cars and we also play pay vehicle excise duty. This will be a kind of per mile charge to sort of replace the revenue from fuel duty as we transition. We would think from petrol cars to electric cars. So, so you know the level at which this is set, how it’s going to work. All of this is quite uncertain, but obviously it changes the kind of burden on those who drive further. Now you can say that that happens with fuel duty anyway, because obviously the more fuel you use, the more fuel duty you pay. But obviously vehicle excise duty isn’t done on the basis of mileage at the moment or anything like that. And so, it is an interesting one. And I suppose those who you know, for example, live in rural areas and that sort of thing, you know, that means a lot more tax will be paid by those people, and you know there might be a kind of fairness argument, but this seems to me like something that I suppose people at the treasury probably have been wanting to introduce for a while, you know? Yeah. To move to, like, a more per mile, you know, in terms of even things like vehicle excise duty, which is the theory about, you know, maintaining roads and all this. Although of course it’s not actually hypothecated for that. You know, the more you drive, the more you use, you know and so it’s just an interesting one that it’s probably a sign of things to come because the government does need to think of a way to replace the revenue that that there’s like quite a lot of revenue that they get from fuel duty with something which is going to be in reference to electric cars, and therefore for the use of roads by those cars.

João Sousa  27:49
And just quickly, we haven’t got that much time left, but Mairi and I have done lots of fiscal events. But Spencer, you have, you are newer than we are to covering these from the outside anyway, so I wonder if you could kind of finish us off with like a reflection on this whole process, you know, how did you find it? And did you find it as chaotic as we did? It’s a bit of a leading question.

Spencer Thompson   28:26
Oh yes, I think is the answer. Although I suppose from my perspective having everything published a couple of hours early gave me a lot more time to sort through things. So, in that sense it was maybe a little less rushed, but yeah it seems like it, it would be nice just to have a bit of a normal a normal budget for once in a while, but it was very exciting. I enjoyed it very much, but yeah, as I say from my perspective, still very much looking out for the Child poverty strategy and what that contains so it’s not over yet, I suppose.

João Sousa  29:06
Yeah, that’s a good place for us to end. It’s good to know that our reflections are shared a little bit on this. So, thanks both for joining me today and to our listeners. Thank you very much for being with us. Do look out for my analysis on our website www.fraserofallander.org and until next time we’ll see you then.