Welcome to the Treasury Committee on Wednesday 3 December 2025. I am delighted to continue our discussions about last week’s Budget. Today, we have four experienced and senior economists to discuss with us the outfall of what happened last week and to inform our discussion with the Chancellor next Wednesday, 10 December. I am really delighted to welcome Professor Tera Allas, who is the chair of the advisory committee at the Productivity Institute. She is joined by Ruth Curtice, who is the chief executive of the Resolution Foundation; Hellen Miller, who is the director of the Institute for Fiscal Studies; and Peder Beck-Friis, who is an economist at PIMCO. Welcome to you all. I want to kick off with Ruth Curtice because you have worked in the Treasury during Budget processes. Were you surprised by the amount of information that seemed to be flowing during the Budget negotiations and discussions?

The amount of speculation and pre-briefing in the run-up to this Budget was unprecedented and unhelpful. I hope we have the opportunity to reflect on that and think about what we might change to improve the UK’s fiscal framework.

We now know there is a leak inquiry under way in the Treasury. We await the outcome of that. As a Committee, we would welcome that. I will start with Helen Miller, but I am interested in the rest of you. The speculation, leaks and information that was coming out will potentially have had an impact on the market and gilt rates. Helen Miller, are you concerned about whether that sort of information coming out had an impact? Can you give any assessment of what impact it had?

I agree with what Ruth just said. It was unusual. It was concerning for a whole range of reasons, not just because the market might move but because firms and individuals are holding back their decision-making. It is taking up a lot of brain bandwidth that could have been better employed. It is also worth saying that it is not just about whether there are actual leaks in terms of things that should not have happened, although maybe that will be found out. Rachel Reeves herself gave a speech on national television. There has been a lot of speculation about what that meant. It was not the clearest of communications in my mind because nobody quite knew what the Chancellor was quite trying to indicate. The markets are trying to guess what is meant and what is going to happen so they can move. I do not have a number in terms of what effect it had on the market. Maybe others do. In some sense, the market is always going to move around. If it just dips a little bit and then dips up again, that is not going to matter for national productivity. The important effect of this is not that the market moved and then corrected again. It is more that point about holding back real economic activity and taking up bandwidth that could have been better employed.

Dr Peder Beck-Friis, you work in a different sector. Did this worry you? Did it make your business do things differently?

There has been a lot of volatility in gilt markets this year. We saw this in early July after the U-turn on welfare cuts. We saw this in mid-November after the FT article on the Government not raising income tax rates. In all scenarios, gilt yields have come down. They went up and then they have come down. So it has been volatile. It is important to put this in a global context. We have seen a lot of volatility in global fixed income this year. We saw this in the US in the spring with the tariff announcement. We saw it in Germany at the start of the year with the fiscal stimulus package. Even in Japan over the last few months we have seen a lot of volatility in the bond market, which historically is pretty smooth and does not exhibit much volatility. In that context, the UK does not really stand out. Zooming in on the UK specifically, clearly the fiscal headroom meant that gilt markets were more sensitive to fiscal and political developments. Zooming out, the starting position in the UK is that fiscal finances are—I am sure we will get back to this—in a fairly fragile state with a fiscal deficit of 5% over the last five years. In that context, gilt markets will be sensitive to fiscal and political developments.

Where does the UK rank internationally? You mentioned the 5%, which is a concern. You are working across markets and countries. Can you give any assessment of how you see the UK and the financial management by the Government?

Debt sustainability depends on many factors. Where the UK does stand out is how high interest rates in the UK are relative to underlying GDP growth. We are seeing roughly similar numbers in Italy, but that is where the UK really stands out. There are many things that dictate debt sustainability. From a global point of view, in most developed market nations, fiscal credibility is not an immediate concern because debt levels are simply too low. That applies to most European countries, Scandinavia, Australia, New Zealand and to some extent Canada. There are a handful of countries where I would say the fiscal finances are more fragile but broadly sustainable under the current path. In that bucket I would include the UK, Italy and Japan to some extent. You then have a handful of countries where debt looks broadly unsustainable under the current path. The two biggest countries there are the US and France. The UK does not significantly or meaningfully differ from some of the larger countries, but the starting level is that it looks fairly fragile, yes.

Professor Tera Allas, do you have any thoughts on this?

In terms of consumers and businesses, which are ultimately the actors in the economy that drive growth or do not, it has been harmful to have such a long period of speculation, but it is very hard to tell from the numbers whether it has been absolutely material. If it continues to repeat, it might get baked into a sort of premium there as well. As was said earlier, this does have an impact on actual activity. It has an impact on consumers, whether they spend or save, and it has a big impact on whether businesses invest. That holds back productivity growth and holds back broader growth.

Can I just go a little more into this point about speculation? For several weeks, probably several months, we had speculation about wealth taxes, changes to the way that property is taxed, changes to pensions, what would happen to the tax-free allowance and ISAs, to name but a few. As a Committee, we have to work out what the effect of that was and how to quantify the behavioural shifts induced by material uncertainty over whether those tax situations will be unfavourable after the Budget. Do any of you have anything to say about how we can quantify those behaviours? There is some evidence that people did make material decisions with their pensions and how much to put aside, et cetera. Unless we can quantify it, we are just making nice commentary. Is that because it is not material or because nobody has done the work? I invite anyone to respond.

You are right. It is a problem. Everyone likes quantifying things. I do not have a quantity for you about exactly how damaging it was. Remember that you need to have some sense of a baseline, in the sense that there is always speculation in the run-up to a Budget. People are always talking about what the Government might do. What is unusual this time is the degree of speculation. That is partly happening from a combination of the very small headroom and these big tax locks, which means that people knew that something was coming, but they knew the big levers were off the table. That is why lots of small taxes were being talked about. In a more normal time, we would not have been getting down the list. In some sense, the nature of the speculation is also different. With all that said—I do not have the exact numbers in front of me—there is a piece of work that has been happening for a long time now, led by Professor Nick Bloom at Stanford, who has done lots of work on the effect of policy uncertainty on outcomes. They have an index of policy uncertainty and they have some evidence on the link between that and real outcomes. In principle, one could—I cannot remember the elasticity—look at how much policy volatility affects things. In principle, you could look at a measure of policy volatility over this period. It would not be perfect because, to the point I made, the nature of the speculation is different, but that might be a first way to get a handle on some sense of scale.

If I can briefly add to that, I did look at the policy uncertainty numbers. That is one element of uncertainty. The UK’s policy uncertainty has been a little elevated in the run-up to the Budget relative to global averages, but there are other kinds of uncertainty in the world as well. If you are a business investor or a consumer, that other uncertainty matters too, whether it is geopolitical uncertainty or technological uncertainty. There it is more of a missed opportunity. The UK’s uncertainty numbers on those broader measures are lower than global because we are not as exposed to tariffs in the US, say, as many other countries. We are not as exposed to some of the geopolitical developments in the world. I would be quite moderate about attributing any sort of impact in the real economy to the speculation. I would be more warning into the future that, if it becomes a repeated pattern, it will keep dragging down the reputation of the UK as a place to invest.

We got away with it this time, but we will not next time.

I do not know how many times it would take before it becomes a repeated pattern in the sense that it really starts having a major global impact.

Ruth Curtice, a lot of the Resolution Foundation’s previous ideas have been aerated over the last three or four months for obvious reasons, given one of your predecessors. Do you have any observations about how important we should take that to be as a Committee?

I would distinguish between two types of speculation. One is the information about the forecast, where there has been quite a notable shift. The question there is whether we want to revert to a process that is more secret or whether we want to go to a process that is more transparent. It strikes me that the middle ground that we are in is very unsatisfactory. You are asking a different question, which is speculation about specific tax measures. That comes much more, as Helen says, from being in a situation where we had low headroom and tax locks in a manifesto. It was difficult to see how those two things added up, and therefore we had speculation that roamed quite widely. One thing that the Chancellor has not done in this Budget is to give a sense of where she would like the tax system to go in the future in a way that might help constrain that speculation, if we end up there again.

Can I just build on that very briefly? This picks up on Tera’s point about different types of uncertainty, which is really important. Another form of uncertainty around the UK is that UK policy changes an awful lot. If you think of corporation tax policy, it has changed an awful lot even since 2010. Every year we have had big changes. There is another set of changes now to writing down allowances. There is a sense that policy is always changing and that people do not know what policy will be in a few years’ time, partly because there is not this vision for tax policy, as Ruth just set out, and partly because the evidence suggests that it changes frequently. That uncertainty, which is nothing to do with speculation but to do with businesses thinking about what they know, can also have a damaging effect on incentives.

In the run-up to the Budget, there is a certain discrete group of people who have access to Budget information in the OBR and the Treasury. Did any of you have any contact with any of the people on that list prior to the Budget? Professor Tera Allas is shaking her head.

No. We do a preview of the Budget. We share that with the Treasury in advance. We did not have any information.

You proactively put that in; you do not talk to them.

Similarly, we speak to civil servants all the time about tax policy, but we are not—

You are not getting it back the other way.

No.

It is also a no from Dr Peder Beck-Friis.

I just have a quick follow-up for Ms Miller. You mentioned changes in tax and so on. Another reason why people say some of these leaks may occur is to fly kites and take soundings. Does that not point to another wider point? The way that we do tax policy in Britain needs a thorough rethink so that things get consulted on properly when we can and things like that. There is a need to look at the whole process around tax policy.

Yes, absolutely. As I said earlier, some of these things might be actual leaks, so information that the Government did not want to get out of the door. Some of it does look more like kite flying. In a sense, it is absolutely fine for a politician to want to go and speak to people about what they might think. The problem happens when it is very close to a Budget and it is feeding into this, “This could happen; this could not happen”. That kind of speculation is not very useful or at least it comes at a cost. If a politician wants to test the water or fly a kite, it comes at a cost. People might change their behaviour as a result. On the broader point about tax policymaking, I do not want to over-emphasise this. Our system is not awful. We do have a process of consultation. Some of that works actually quite well, but it could be better. There will always be tax policies that you do not want to announce in advance because they will change people’s behaviours. You also do not want to go to the other extreme and say, “We want stability, so we will not change anything”. On average, you want predictability. You want a sense of where you are going. You want a sense of what you are going to change. You want some time to consult, especially on the technical details of some of these things, so they are not being done very quickly in the six weeks running up to a Budget. It is not a disaster. We have a better process than some other countries, but there is absolutely room to improve tax policymaking. What we really lack—I have come to believe this more and more over time—is what Ruth was mentioning about vision. You have to start first and foremost with what you want the system to do and where you are trying to get to. Then you can plot a path towards it. You do not tend to have that with our Governments, at least in my career. Therefore, you are taking steps in the dark, in some sense. You need to start with that vision piece.

Yes, I genuinely think this choice between secrecy and transparency is quite difficult. There is lots in favour of a completely secret process. It might limit the extent to which we have months of speculation, for example. We have just talked about the damage of that. On the other hand, if some information is going to become public, it would seem to me better that everyone has the same information and it is given to the market in an orderly way. One way to do that would be to release that pre-measures number, for example. There is a genuine trade-off between secrecy and transparency, but limited information going to newspapers is not a helpful place to be.

It is quite a small change, so I do not share your worry. It looks quite small to me. It looks like the OBR will publish most of the same information, and I do not think you will need to be on this panel to be able to understand what is going on. That does not seem a step away from transparency. In the way that is presented and described, the Treasury is clearly trying to move away from having to have a policy response necessarily assumed and baked in.

It is good that she is trying. It is unhelpful that the UK changes tax policy quite so dramatically twice a year. I would like to be part of trying to help that happen. The change that she made in the fiscal rules to have a range around those rules—although it does not kick in next year; it kicks in the year after—might be more significant than the move away from twice‑yearly formal assessment in helping achieve that.

My take on this is that it is very good to have two forecasts. It is good for transparency. It is also very good to have one fiscal event because it is good for policy volatility. The question is always then, “What do you do in the fiscal event in which there is no formal assessment?” You are absolutely right that everybody will be able to open the OBR documents and look at whether the fiscal rules would have been met, had they been assessed. That is fine. The question that has not really been answered is the one that you are asking. At what point would the Chancellor take action? What would it take for her to decide that she wanted to do something in spring? The range mechanism that Ruth sketched out answers that question. It says, “As long as nothing outside of this range happens, I will not act”. I prefer that. In a sense, it is more specific about when the Chancellor will not respond. This is just saying, “I will not respond unless something extraordinary happens”. I cannot remember the wording, but it is not quite clear. Another thing that I would point out is that there is a question about the timing of that second forecast. There are different ways that you could think about it. If you think about it as a first round of information so that everyone knows what is happening and then is waiting for the Budget, it makes sense to make it closer to the Budget. It should be at least halfway through the middle of the year, if not closer. Where we are now is sort of a historical accident. We used to have the pre-Budget report in the autumn and then the Budget in the spring. The pre-Budget report was the first information, and then shortly afterwards we had the Budget. That timing has stuck, but the events have almost reversed. There is a question about whether we should be moving that second forecast, the spring forecast, further into the year or closer to the Budget. If things did look particularly bad and we knew that action was needed, there is now a long period between that and the next event.

Dr Peder Beck-Friis, you look like you have something to say on this.

I share a lot of the comments. Bond markets will be fairly relaxed around this new change. It does not strike me as a big change. We will open the OBR document and pretty quickly figure out whether the fiscal rules have been met or not. Frankly, in most cases, we would not need the OBR to tell us that. If interest rates spiked by 1% next month, we would pretty quickly figure out whether the fiscal rules are met or not met. Frankly, from a bond market point of view, we will not be overly focused on what the deficit will be in 2029. The uncertainty band around that number is so high. We will increasingly be more focused on actual deficit reduction over the next two years and especially proof that the UK can manage to reduce the deficit to around 3%. There is nothing magical about 3%, but that is roughly where we think that the debt-to-GDP ratio in the UK will start to stabilise. Once you get to that level, I suspect the bond markets in the UK will be less sensitive to these developments. I will give you two examples. Both Spain and Italy had high deficits during the pandemic. Both countries have succeeded now in bringing their deficits down to 3%. The bond markets have been very relaxed about that. In fact, yields in those countries have fallen relative to Germany. We will increasingly be more focused on the actual path for the deficit over the next two years, as opposed to what the Government or the OBR forecast that the deficit will be in 2029.

We compare countries on a like-for-like basis from a debt sustainability point of view. The near-term deficit is more credible than the long-term expectation of the deficit. We do our own debt sustainability projection for each country and base our investments partly on that information. I am sure we come back to the fiscal rules. To take one example, in Europe the fiscal rules are very complicated. I have been working in the European bond markets for a long time and I still do not understand the fiscal rules, given the number of footnotes and caveats. However, a lot of the fiscal rules impose some constraints on what the Government can do this year and next year as opposed to what the Budget or the deficit has to be in five years’ time.

One of the big decisions that we heard about yesterday was the decision by the OBR to downgrade the UK’s medium-term productivity. Yesterday, I asked Professor Miles, who is the macro forecaster on the committee, why that decision had been made now and not earlier. His answer to that was that he wanted to give two years of space between the end of the energy and pandemic shocks, which finished around mid-2023, before making any judgment. There is a discussion about whether two years is too short or too long to make that new judgment, and some other organisations have made judgments earlier. I wanted to come to Professor Allas. What is your assessment of whether two years was too long to wait?

It is a reasonable amount of time to wait. We will never know what the future of the productivity number should be. It is and will always remain uncertain. I would say, though, that we have had 0% productivity growth in the last two years. Again, I want to emphasise that there is an enormous amount of judgment that goes into those numbers. There is not going to be a single correct way of when or how you should do it. I personally think it is a little bit risky not to have a range around it. It goes back to your questions earlier about headroom. It is almost like the tail wagging the dog. The headroom will continue to change because the economic reality is more complicated than the models can ever give credit for. We just do not have a crystal ball. Two years is totally reasonable. It will need to continue to be reviewed all the time. What gets published or not is a different question. As Peder has said, the markets are doing their own reviews all the time as well. They do not just take the OBR forecast. They look at lots of different other factors as well.

If I might just add, over the last couple of years we have also had this very specific challenge around the labour market data, which I know this Committee is aware of. What you believe about what is happened in the labour market since the pandemic is completely crucial to what you think has happened to productivity. On the very specific judgment, that was an added challenge that we had, which was quite particular to the UK. When you look at the bigger picture, though, the OBR has been making for a long time a productivity assumption that includes giving some weight to the pre-financial crisis period. That has looked increasingly out of date for quite some time.

We have, for a long time, been quite surprised by the optimism of the OBR in terms of productivity forecasts.

What do you mean by “a long time”?

Since before the pandemic.

For five or six years, then.

We do not pretend to be better than anyone else at forecasting productivity growth, but a good starting point is to look at what productivity growth has been over the last five to 15 years. Over the last five years it has been 0%. Since the financial crisis it has averaged about 0.5% annualised. I am sure productivity growth will pick up at some stage over the next few decades. I have no idea when it will, but a good starting position is to look at where productivity growth has been. The forward-looking fiscal rules depend on the productivity assumption in five years’ time. There may be an argument to tie that number to rolling five-year or 10-year productivity growth in the UK to remove assumptions around productivity growth going forward.

Professor Allas, you have a particular interest in NHS productivity growth. What is behind the UK’s low productivity growth in public sector work? What would you have liked to see in the Budget that could start to remedy that?

That is an enormous question. I will try to give you a brief answer at the highest of levels. We have many systemic challenges in the public sector. I would caveat, first of all, that it is very difficult to measure public sector productivity correctly. Ultimately, we want to be able to measure the outcomes such as healthy life expectancy, the income boost that people have from some training programme or whatever. That is hard to do because it takes several decades to come to the point where you know what the outcome was. Having said that, we have some measures of public sector productivity that try to measure the quality and quantity of the output. On those measures, it has been a very poor showing for the last several years. It has been made worse by the covid pandemic, for sure, but part of it is inherent. Some of the discussions that we have been having about the Budget also apply to other policymaking. There is a lot of new policy made all the time. When you are in an environment such as that and you are never taking anything away, you are inherently adding a lot of complexity to systems, rules and regulations, and how you are running your operations. Unless you purposefully go out of your way to simplify, take out waste, improve digital usage and change legislation, in some cases, to simplify your policies, it is very hard to drive up output divided by input. In the case of the NHS, we are still working out the diagnosis to the problem as part of the NHS Productivity Commission. It seems to me like there are a lot of bottlenecks in the system and in the resource that has been allocated to it. The number of staff working in hospitals has gone up by 15% since 2019, but the number of discharges has gone down by 13% or 14%. Normally, you would expect output to go up when you put in more resources. Maybe that was not the bottleneck resource. Maybe what we needed to spend the money on was more managerial or process-driven activities, more digital technology or better estates. Do you see what I mean? It is about allocating the resources correctly. It is about system-level incentives and guidance around how you run an operation that is complex. A lot of it comes down to leadership and management as well.

I have a particular constituency interest in this because in Reading we have been waiting for the Royal Berkshire Hospital to be rebuilt for many a year now. You have done work comparing capital intensity between different countries. Is capital intensity a problem for the public estate in the UK? How would you seek to remedy that?

Let me answer that for the NHS first and then I will give you a broader answer. For the NHS, absolutely, yes. In the initial report from the NHS Productivity Commission, we found that, had the UK stayed in step with other comparable countries, we would have spent £33 billion more on capital in the NHS over the decade running up to the pandemic. We are missing a lot of capital, whether that is digital systems, the right kind of estate or MRI machines. The challenging thing about this is that it is not one thing across the board. In every hospital, GP practice or other setting, it might be a slightly different thing. We need a cleverer system of allocating that capital. On a broader public sector basis, I have been mostly looking at this from a broad macro productivity point of view with the idea that public sector investment, if put in the right places, can crowd in private sector investment. Private sector investment is much bigger than public sector investment in broad terms. It is hugely important for productivity growth. If there is one thing that drives productivity, it is investment. In that context, the data is very clear. Lots of think tanks have put out papers saying, “We invest a lot less in this country”. That includes the public sector level of investment as a share of our GDP. The only other thing that I will say now—I am very happy to answer follow-up questions—is that in this Budget there is language about protecting the capital budget and investing £120 billion more. We have to keep in mind that that is £120 billion over the entire Parliament. It is relative to what was going to be a downward trajectory. When you take a step back from the numbers, the percentage of total managed expenditure that we continue to spend on capital stays exactly the same at 11%. Capital DEL as a percentage of GDP stays exactly the same at 3.8%. Yes, it is good to have protected that, but it is not a credible step-up in terms of driving productivity and driving public sector investment.

Just on your point there, Professor Allas, I agree. How on earth can we expect productivity to improve if we are not actually increasing public investment?

Well, indeed. There are ways of improving productivity without investment. Economists have a formula for productivity, if we are talking about labour productivity here. It is about both investment and what we call total factor productivity. Total factor productivity is things such as innovation, organising your processes more efficiently, and competition driving out worse actors in various sectors and giving market share to better actors. Reorganising your operations, your processes and your manufacturing, for example, can all drive productivity with very little investment, but you want both. The importance of public sector investment is one of opening up opportunities for businesses. If you are investing in bottlenecks, such as transport, digital or energy bottlenecks, that allows private sector investment then to go ahead.

One of the most effective areas of public investment is investment in innovation. Philippe Aghion won a recent Nobel prize in this space. The OBR does not credit government intervention and innovation policy as having had any impact over five years. Does that disincentivise the Government from investing in public R&D?

I hope not. The Government should not be making decisions purely on the basis of whether the OBR scores them or not. I hope they do not. Growth is not our only objective in this country. We want people’s lives to be better. That is not just about growth. Where the OBR is probably right not to score some of those things is if they are tiny or immaterial. Given that it rounds up its GDP numbers to 0.1%, it cannot score this because a lot of these innovation interventions are very small.

The OBR put out briefing paper 9 on productivity forecasting. It was interesting. In the literature review on public R&D, it states that some of the literature says that a 10% increase in UK R&D capital could give a long-run increase in total factor productivity of 1.9%, which is a huge number, given that the 0.3% downgrade drove a £16 billion fiscal hole in the recent Budget. It also says in that box that it is not giving any benefit to the Government for R&D in terms of boosting productivity because, as you say, it is flat or too small. Does that surprise you that the Government have chosen not to increase R&D, given that it is a relatively small number in the overall scheme of things and its number one priority is growth?

It is trickier than that. Not all R&D is created equal. There are big debates about what kind of R&D will drive productivity growth. By the way, growth should not be the only objective of R&D. A lot of health R&D is incredibly important for saving people’s lives or making them better. It does not necessarily drive growth. It is still very much worth having. I am not able to comment in detail because I understand that the Government are reforming some of the R&D system as well at the moment. I do not know what the new system will look like. I would take a step back and say that, looking at the broader picture, if there were some space in the fiscal rules and the fiscal strategy, you would ideally be spending more money on capital to relieve growth bottlenecks. You would basically shift the balance between day-to-day and capital.

Dr Beck-Friis, the fiscal space point is interesting. As we know, the EU has a similar but not as bad issue with productivity. Mario Draghi, in his keynote speech to the EU in September, urged the EU to borrow for R&D, especially defence R&D. He stated that even a modest 2% total factor productivity increase over a decade would cut the EU’s public finance burden by one-third and that, if you borrowed for R&D, debt-to-GDP would fall because output rises more quickly than interest costs. Would that be a credible strategy for the UK or is the supposition in the bond markets such that that would not be credible?

The fiscal situation in Europe is slightly different, especially if you look at Germany. There is much more fiscal space than in the UK. The starting position in the UK on the fiscal side is that there is not much room to increase borrowing. Do we care whether the Government borrow to invest or to spend? Frankly, from a bond market point of view, there may be second-order effects, but the first-order effect that we look at is the headline deficit. That is the number of gilts that the Government need to issue. You raise a good point about productivity in Europe because productivity growth in Europe has been equally bad over the last five years. In fact, it is a global thing. It is happening in Canada; it is happening in Australia. The one country where productivity growth has been strong since the pandemic is the US, but the rest of the world’s productivity growth has been very weak. To me, that speaks to global factors mainly driving this. I do not think there are any obvious near-term answers here, but what drives productivity is a very difficult question. There are global factors in play. If you look at the UK, historically the big shift in the UK happened after the financial crisis. Before that the UK was growing on a par with the US. Ever since there has been a shift in productivity growth. There was even another shift in productivity growth since the pandemic, but that is mirrored in other countries as well.

Finally, Professor Allas, is the OBR’s method for forecasting productivity sufficiently rigorous? I am thinking in particular about the fact that its use a top-down judgment rather than a bottom-up forecast for productivity.

There is never going to be any one right way of doing it. It would benefit from broader discussion and debate. As I said earlier, honestly, it would benefit from having a range around it because everything becoming so focused on a single number is not that helpful. We know that the number is not going to be that number in a couple of years’ time. It is going to be either more or less. We just do not know which way around.

Professor Allas, you mentioned the missing £33 billion—is that right?—of capital investment in the NHS in the last decade. For a figure of that amount in terms of what the Government would need to invest to raise growth, we are clearly constrained by multiple factors. I am keen to hear the panel discuss whether the main constraint would be the bond market reaction in terms of how much yields might jump if there were more borrowing for long-term growth-enhancing investments; fiscal institutions and fiscal rules; or—option C—something else that I have not yet mentioned. It is a multiple-choice question for the panel. Does anyone want to begin?

I am happy to kick off. The fiscal rules are not constraining capital investment under the current set of rules. The rule that we focus on, current Budget capital spending, does not score there. It is not fiscal institutions because the Government set those rules. We cannot ignore—this might be in your “other” category—that borrowing that money still costs money. When it costs more for the UK to borrow than elsewhere in the G7, that is the real constraint on capital spending. That means the number of investments that pay for themselves in the long run is lower than if that interest rate was lower.

For you, the main focus for the Government should be to reduce the yield rate and therefore be able to create more space for productive investment. Is that right?

The Government should constrain their capital spending according to that interest rate. Therefore, in a period of high interest rates, fewer capital investments, unfortunately, will be value for money.

Just to add to that, the question is never, “Can we borrow?” Yes, we can borrow. It is the point that Ruth is making about the cost of that borrowing. Is it worth it? It is also the case that, as Tera outlined, investment is flat under the Government relative to a baseline where it would have been falling. It is still a lot of investment, and the Government had choices about how to allocate that investment. They are political choices. The Government could have poured all that money, in principle, into public R&D. They did not. They put a big chunk of it into net zero and a big chunk of it in defence and weapons. Some of that is R&D; a lot of it is not. I am not making a statement about the wrongs and rights of that. I am just pointing out that we have factually borrowed a lot of money. We made choices about where to put it. We did not put it predominantly into pro-growth innovation and R&D stuff. Given the bond market and the interest rate, we could have made a different choice. We should get into the habit—by “we” I mean politicians and the Government—of not always saying, “Could you borrow more for something else?” Of course you could borrow more for something else. We are not at the point where we cannot do that. The question is more, “Do we want to borrow more for this particular thing?” Where we are borrowing for other things already, are we borrowing for the right things? Should some of the things that we are already borrowing for be paid for out of current revenues? Should we have put some more of the current borrowing towards different capital investments? They are political choices. You can clearly make the case that, had you put more money into growth-enhancing things, such as infrastructure and public science, that would have had a bigger payoff in terms of growth, but you would have had less of something else. You would have less of a social good, less of net zero or something.

Can I add a quick footnote on that? I totally agree. It is broadly also an allocation question. Even inside those buckets for R&D—I used to be the chief economist at the Department for Transport—there are some projects that are incredibly good value for money and could easily pass your test around whether they will pay back more than what you borrow with the cost of borrowing. Then there are others that are incredibly bad value for money, and some of those still go ahead. I agree with the panel here that it is a political constraint more than anything else.

In terms of borrowing for capital investments, if the Government did borrow for more capital investments, the reaction in the bond market would be higher yields. The way that we would think about this is, “Do we think this capital investment will translate into higher GDP growth?” That may be a positive. However, again, the uncertainty band around these things is so high that the market will discount this. The same applies to the net financial liability rule. You include some assets. We look at gross debt on a like-for-like IMF basis, and then we think, “Do we think the debt or these assets will lead to higher GDP growth?” If we do not think that, it leaves us with a simple measure. It is easy to say from a bond market point of view, but there is not much fiscal space. It is important for the Government to show that they can reduce the deficit to 3%. The good news for the UK, from a cyclical point of view, is that, even though there is not much fiscal space, there is a tremendous amount of monetary policy space. We live in a very different era than before the pandemic. Back then, we had no monetary policy space, where the interest rate was zero, and we had much more fiscal space. Now we have the flipside of that. Whatever the Government can do to bring inflation down and allow the Bank of England to reduce interest rates, that could provide not a structural shift in growth in the UK but at least somewhat of a cyclical sugar rush and, if you like, act as a shock absorber to the fiscal tightening that the Government are planning.

You have all painted quite a challenging picture on productivity, despite some excellent questions from my colleagues. We have explored the quantum problem—how much—and then the measurement problem. I wanted to pick up on what you said about the issue of America and where it is different. Could you set out what the trade-offs are, why it is in that different situation and what we would need to do in the UK to replicate some of that? We often hear it said, but we do not really want to focus in on the choices that that implies.

I am not an expert in terms of productivity and what drives that, especially in the US. If you look at the Draghi report and compare European productivity versus US productivity, it looked pretty similar across most sectors, apart from one, which is the tech industry. The US has a much more vibrant tech industry than what we have in Europe, but I would leave it at that.

Is there anything else any of you would like to say about what we could usefully import, apart from tech?

Broadly speaking, I completely agree with that. A lot of the productivity growth in the US has been driven by the tech sector. In terms of that sector’s increasing returns, it benefits from these massive agglomerations, having a large home market for the US and all the capital and talent that is there. I do not think that that is ever going to be replicable by the UK, or even the European Union. There is some research suggesting that there are some brakes in terms of risky investment into other European countries and the UK because of the costs of restructuring. If you invest into a very risky venture, you have to take into account the fact that it might go bust. If it were to go bust or you have to restructure and shrink it, you are going to need to let people go. If that is a costly and difficult or legally risky process, you are less likely to go into those ventures. That is one important aspect to keep in mind. Beyond that, there is not a huge amount that we can do. The only other thing I will say is that economists talk about this thing called creative destruction. From some work that I have seen from the US, a whole one percentage point of its productivity growth—we did not even have 1% for the last 20 years—comes from this creative destruction, meaning that some companies that are better, more efficient, more productive and more innovative take share from other companies and then those other companies go bust.[1] There is a question mark around whether we are somehow not allowing not-very-good businesses to go bust. It sounds like a terrible thing to say, but, from an aggregate point of view, if that does not happen, you are trapping resources into less productive places in the country.

That is what I was accused about on bounce back loans. I set up all the bounce back loans to protect all the businesses and then I was told that a good number of those businesses may have gone bust anyway. I was thinking, “What could I have done?”

I should say that Mr Glen was the longest-serving Economic Secretary to the Treasury since the second world war.

I have not heard that one before.

We are very privileged to have him on the Committee.

I have a quick extra question on gilts. Dr Beck-Friis, you have talked about the fact that gilt yields improved post Budget. You have talked about some of the factors going forward that might influence gilt levels, such as deficits and monetary policy. You have put it in a basket that is—I think you said—fragile but sustainable going forward. Are there any other, more granular, things that the UK could be doing to get gilt levels to improve? For instance, it has been suggested that issuing more debt in shorter-term maturities has influenced gilt levels. The Bank of England quantitative tightening programme has influenced it as well. Are there any lessons for us to think about how those institutions work to try to get gilt levels improved?

You raised a lot of good points there. The DMO has done a very good job in shortening the maturity of the issuance, given how steep the yield curve is. Let me put this in context. Yields in the UK are very high on an international basis. They are broadly on par with Australia, but higher than in the US or Europe. This year, gilt yields have fallen in particular in the front end of the yield curve, so five-year or two-year yields. That contrasts with many countries where yields have increased, so Germany and Japan to give you two examples. If you like, the rest of the world is catching up with the UK, at least this year. That said, the level of yield is high on an international basis and there are two reasons behind that. The first reason is that, if you look at the shape of the yield curve, it is a little bit steeper than in other countries. When I say steep, if you look at the difference between 30-year yields versus 10-year yields or five-year yields, it is a little steeper than in other markets. Again, the rest of the world has steepened more this year than in the UK, but it still remains a little bit steeper. That may reflect some form of fiscal credibility risk premium, but it is very difficult to disentangle because there are many different supply and demand technical factors that are changing this year, and you mentioned some of them. The Bank of England is the one large central bank that is actively selling gilts in the secondary market. Pension insurance companies are generally reducing gilts, so overseas investors have stepped in. Against that, the DMO, as you mentioned, has shortened the maturity. It is very difficult. There are many technical factors going on in the long end. The primary reason why interest rates are high is that the front end of the interest rate curve is high. The Bank of England policy rate of 4% is among the highest in the developed world. Not only that, but markets are quite sceptical in terms of forecasting how many more cuts we will get from the Bank of England. At the moment, financial markets expect between two and three more cuts from the Bank of England and then they stop at about 3.4%. If they were to stop at 3.4%, they will most likely be higher than in the US, based on financial market pricing. It would be quite unusual from a historical point of view if the UK ended up with higher policy rates than in the US. The reason the front end is high is that inflation is high. Inflation is high in the UK versus other countries. We are quite positive on gilts, especially at the front end of the curve. We think that that looks a little bit mispriced and we would expect the Bank of England to cut more than is priced into financial markets. As and when inflation continues to come down, in the context of the weakening labour market and the tightening fiscal policy, we would expect the policy rate to end up lower than what financial markets are expecting and pricing in.

Ms Miller, we expect £22 billion headroom in 2029-30 against a target for the current account to be in balance. How confident are you that that will be met?

It is worth remembering that the concept of a headroom is a future concept. In some sense, you never get there, because by the time you get there the measure of the headroom—that is not a glib point. It is how the rules work. It is always a sense of where you are going to be in five years. By the time five years comes, you will be looking at something different. If the question is whether, when we get to five years out, we will have a surplus of £22 billion, I do not know, obviously. The reasons to be concerned about that are that, at that point in time, we will be near an election and that the current plans have a tightening coming in at the end of the forecast period, so the tax rises we have seen being implemented are being implemented at the end of the period. The fact that a big part of that tax increase is the freeze in thresholds makes it more likely that it will go through, because it is quite stealthy, and there will be no day on which people see a jump in their nominal tax bills. It is now baked in the books for it to just happen, as opposed to there being, for example, an increase in income tax rates in an election year. I think that that would have been harder relative to that. I am not saying that it is right or wrong, but that makes it easier to imagine it happening. There are also the issues about spending. The Government have pencilled in some cuts to day-to-day spending that they want to achieve through efficiencies, but they have not yet identified those efficiencies, so there has to be a question about whether they may not actually be delivered. It all points to the fact that there is clearly a risk that, when we get there, we will not have had a consolidation that is as big as the Government currently—

On a scale of 1 to 10, where 10 is extremely confident and 0 is not at all confident, where would you put yourself in terms of having a surplus on the current account in 2029-30?

I do not know where I would put myself. I would not put it as a 10. I definitely would not nail it on as “definitely going to happen”, if only because the historic precedent is that Governments are much better at saying, “I want to get into this position” than they are at actually delivering. It will depend, in part, on what happens in the next couple of years. We have seen the horizontal move in the deficit, so pushing out the consolidation. This Budget did that, but Governments have often done that. They have moved along the point at which these things happen. To be more positive, it was a bold step to do tax rises that are bigger than you needed in order to build a headroom. That headroom is still low by historical standards. Over the 2010s we had higher headrooms, but it is a headroom that would allow you to withstand more shocks. There have been only about six forecast revisions since 2010 that would have taken out the entire headroom, and they included pandemics and such. There is some space for the headroom to get eaten into and still be in a surplus position. I do not know. I am not going to give you a number between 1 and 10. It is definitely not a certainty. I do not think that it is a 1 either, but it will partly be, maybe to the point we heard earlier, seeing how it materialises over the next couple of years. If we see a few more Budgets where things are pushed back, obviously it will be more worrying. If you now see the consolidation that is planned actually materialising, we can be more confident that we might move towards it. It is also worth saying that, historically, the UK is not used to operating in a position of having a current budget surplus. We do not do that very often. It is a hard thing politically to do to raise more money than you are spending on public services, for understandable reasons. That is why the markets will be looking for us to deliver on that consolidation and show that we can move towards it.

I am very mindful of time. Ms Curtice, do you have anything quickfire to add to that?

We forecast a current budget surplus quite often. We have had one once in the last few decades. In that context, moving the fiscal rules from five years to three years increases that probability quite significantly. We tend to focus on this size of headroom, which is the gap to a moving target set by the Chancellor at the time, and headroom to three years is worth quite a bit more than headroom to five years. The OBR’s answer to your question is about 60%, assuming that nothing about Government policy changes, so the answer to your question cannot be higher than 6. It is something lower than 6, depending on how likely you think it is for these policies to come in. Three-quarters of the tax from this budget is raised in the last two years. We think that there is only one other budget since 2010 that has tax rises that are so backloaded.

Dr Beck-Friis, Ms Miller has described an Augustinian current account policy, where we pay off and move into surplus, but not yet. It is always a few years ahead. Is there a point that you can identify where we actually need to move into current account surplus, or else we will move from fragile, as you have described it, to beyond fragile?

We tend to focus more on the headline deficit rather than the current deficit. I understand that that is the fiscal rule. I mentioned this earlier, but, if the Government can reduce the deficit to about 3%, I think that bond markets will be less sensitive to fiscal and political development. I am repeating myself here, but it is important that the Government follow through on the fiscal tightening. Following on on Helen’s point, despite the fairly tough fiscal rhetoric of the last few Governments since the Budget three years ago, the fiscal deficit has been moving sideways at roughly 5% for five years now, so there has not been much of an improvement in the fiscal deficit. The OBR has, not only in the long term—we speak about productivity growth—but also in terms of its near-term deficit projection, consistently been too optimistic. Yes, it will be important for the bond markets to look at the path over the next two years.

What if we do not move towards that path over the next two years?

If you do not move into that path, the chances are that bond markets will start pricing in a higher interest rate in the UK.

On whether it was expected, one thing that we were saying—I am sure that Ruth was saying it too—is that there is always uncertainty in these forecasts. Everything ends up boiling down to, “What is this number?” It was always the case that lots of other things move in the forecast in ways that not everyone can expect. In some sense, we should always expect something to move. On the increase in revenues in particular, I think that most people were surprised. Most models, including ours, did not have that kind of movement in it. What is happening is basically that the OBR thinks that higher inflation will feed through into higher tax receipts, largely because there are so many thresholds that are frozen—fiscal drag pays off—and partly because it has made a judgment about the composition of wages and profits, and wages are taxed more highly. One reason that people were a bit surprised by that, or at least did not have it in their models, is that you do not see that in the tax receipts so far. If you look at the data on tax receipts that we are going to have this year, it is not showing higher-than-expected receipts given the inflation. That does not mean that it is not going to come off. It just might take a bit longer for things to come through. This is not a comment on the credibility of the OBR forecast. I am just saying that some people have looked at the data and not seen it so far, and therefore are not putting it into their models. That is partly why it was not as expected. Is it good news? In pure fiscal terms, what matters for tax revenues is nominal GDP, especially when you have frozen tax thresholds, because more nominal GDP drags more people into tax and more people into higher rates. Narrowly, from Rachel Reeves’s point of view, the fact that she got handed a forecast that had a £16 billion downgrade from productivity but a £30 billion upgrade from other tax receipts is good news. Had that forecast vision not happened, Rachel Reeves would have had a worse forecast on her hands. Whether it is good or bad news for the country more generally is harder to say. If all that is happening is that you have more nominal wage growth and more inflation, and real wages are the same, it is sort of indifferent. If it is telling you something about inflation being stickier and interest rates being higher, and so that is going to be worse for living standards, it is bad news. The real picture is a bit less clear and I have not got to the bottom of quite what it means for the distribution of wages and profits, and whether it is something about investment that is weaker. There is less to say about whether it is good or bad for the real economy. From a public finances point of view, I would describe that as good news for Rachel Reeves in terms of the forecast.

We had expected wages and inflation to be higher in this forecast and for that to somewhat offset the productivity assumption. As Helen says, there is quite a lot going on in any forecast. The extent to which the balance of GDP and labour played a bigger part in that change was less expected, and that meant the receipts forecast was even better than we had projected. As I understand it, a very important assumption there from the OBR is that people will maintain their consumption even when, later in the forecast, their real income declines. That will prove to be another important judgment that it has made. On the other hand, there was also bad news buried in the depths of this forecast. There was more bad news on spending, for example, than we had anticipated in terms of the underlying forecast. It all goes to illustrate that there are a lot of moving parts. On whether it is good news, like Helen, I would tend to focus on what it means for living standards. When we step back, the projection for living standards in this forecast is worse than it was in the spring. It is hard to say that, economically, this was good news overall.

Ms Curtice, you have segued nicely into my questions on living standards. Could you set out what you make of the performance on living standards in this Parliament to date compared with the previous Parliament?

Real household disposable income has grown strongly since the election, compared to the previous Parliament. Looking forward, it drops off quite steeply and leaves this Parliament the second worst ever, after the last one.

What do you make of the measures in the Budget on the cost of living and living standards overall? Is there anything you would particularly highlight? Could you break it down a bit in terms of the next year, the next couple of years and then maybe the rest of the Parliament?

The offset to the backloading of the tax rises that we have talked about is that, in the near term, this Budget net spends slightly. It includes some very important measures on the cost of living. I would particularly highlight the support for energy bills from April, which has a fairly evenly spread effect on households across the distribution. I would also highlight the lifting of the two-child limit as something the Resolution Foundation has called for that will benefit around 560,000 families. To the discussion earlier on inflation, the OBR has estimated a peak effect of this Budget on inflation of bringing it down by about 0.5%. That is quite significant. When we think about the position of the UK and the comments around what that means for the bond market, bringing down inflation in the near term in this Budget was particularly important, as well as a boost for households.

Was there a set of alternative measures that, given the package, so the key tax raises and measures on living standards, you would have liked to see and that you think would have delivered a better pathway on living standards within the envelope?

In terms of specific measures on cost of living, we think that energy bills was the right place to act when you look at the cost of essentials facing households and the way in which those have risen. It is energy bills that remain particularly elevated and where government policy plays a particular role in driving those prices. That was the right area to look. When we think about the tax changes, broadly, a broad-based tax measure on income tax will always affect a range of households. We should not pretend it is possible to raise a huge amount of tax without doing that. A rate rise would have been marginally more progressive than the threshold freeze that was in this Budget.

Ms Miller, I do not know whether there is anything you want to add on the wider living standards point.

We do not take a position on the right and wrong of different policies. There are political choices and different political choices that could be made. I agree with Ruth that, looking narrowly at the tax rises, had the Government done rate increases instead, that would have been much more progressive. A slightly unusual feature of the threshold freeze is that, because people at the very top have already lost their personal allowance through the taper of the personal allowance, it has a lower effect on the very top decile than it would if you had rate increases. On the temporary energy thing, just to add something, it has a bigger effect in the short run than in the long run. In the long run, the giveaway is much smaller because some of the giveaways are temporary. Again, it is not a right or wrong, but there is a choice there. There is a bigger deal in the next couple of years. It is a much smaller cost of living measure in steady state.

We had a discussion yesterday with Professor Miles from the OBR about the measure of living standards. The OBR uses real household disposable income. A key measure for the Government that they set out, in terms of their success over the course of this Parliament, is where living standards are at the end compared to the beginning. Is RHDI a good measure of living standards, or is there a better alternative, Ms Curtice?

It is a good and important measure. One reason it has gone down is because of productivity. We also look at other measures that can give you a better sense of particularly how things are varying across the distribution. We have not produced an updated forecast on those measures, but they will tend to move in the same way as RHDI.

To unpick it a bit, it incorporates housing costs and imputed rents. It is a measure that incorporates housing costs and does not do it after housing costs, as others do. I think that you model it, as does the Joseph Rowntree Foundation. Is that not a better reflection of people’s living standards? The projection on that is slightly worse than the figure that the OBR is using.

It is useful to look at a range of measures. The particular advantage of the after-housing-cost measures that we use, to my mind, is more that you can understand better how different types of households across the income distribution are experiencing things. I do not see immediately anything in this Budget that would give a very different answer for before and after housing costs.

Would you like to see the OBR using some of those alternative measures and producing them in the forecast documents?

The OBR has a big job to do to produce the economic and fiscal forecast. I am not sure that now is the time to add to that job.

What do you make of the redistributive nature of the budget? Was it redistributive?

It was a redistributive budget. As I say, in terms of the giveaways, the energy support is reasonably flat across the distribution. The lifting of the two-child limit particularly benefits families in the lower half of the distribution. The tax rises, although not as progressive as they could have been, are progressive. There are some particular measures that hit the top of the distribution. That means that, overall, when we step back and look at this Parliament, as a proportion of income, we estimate that the lower half of the distribution are losing very slightly, by 0.1%, while the top half are losing by 1.4%.

We do not have the data to zoom in on the 0.1%. I agree; you make an important point that there were missed opportunities in this Budget, in terms of how we tax wealth more and better, that would have focused even more on the wealthiest. As well as the things you mentioned, for example the taxation of partnerships is something that was speculated about and then not included in the Budget. About 70% of income from partnerships goes to the top 1%.

What certainly chimes with what you are saying is that, when we look at the distribution of measures over the Parliament as a whole, it is reasonably flat as a proportion of income in the top half, rather than very steep. It is difficult to do the kind of distributional analysis that we and the Institute for Fiscal Studies do on a very small part of the data, and that is just a technical issue. It does not mean that we should not think about the effects of different policy and how we might tax the very wealthiest more.

I agree with that, obviously. It is important for any given Budget to look at the distributional effects of that Budget and ask what happened. We should also remember that any given Budget is having a tiny effect compared to the £1.3 trillion—whatever it is going to be—we already raise in tax. If you look across a longer period, it has been the case that many Governments have been increasing taxes at the top, and at the top by much more than other places. To take an example that you mentioned on dividends and the additional rate, it was already the case that, if you take all the taxes combined, so corporation tax and dividend tax, compared to other taxes, at the additional rate they were already much more similar across different legal forms. It was actually the basic rate where there was a big difference. It was basic-rate dividends that were being, if you like, undertaxed compared to employment income. It is always worth bearing in mind as well the baseline of what we are comparing to. That is not a statement of whether you should make anything less or more progressive. If you already have lots of progressivity at the top, you do not always need to change every bit of the distribution. There is a choice there about what you want to do relative to what you already have.

It is worth having in mind two distinct forms of equity or progressivity. One is straightforward: if you lined people up from richest to poorest, how much you take from the rich and how much you give to the poor. That is just a straightforward political choice. People differ on that. There is then a really important element that is underappreciated about the horizontal inequities in our system. You take two people who are both in the top 1% or 0.1%. They can be paying very different tax rates depending on how they get their income. That is much harder to justify and defend. A lot of problems we have on dividends and capital gains are about that horizontal equity. I would argue that, for any given degree of progressivity that you might want for political reasons, you could have much narrower, or ideally no, horizontal inequities between people. To your point, that is where we really need the system-wide reform. You want to design the system properly and get rid of those horizontal inequities and differences across income forms. Then you could adjust the tax rates to achieve a level of progressivity overall that matches political preferences.

Just very quickly on electric vehicle tax, there was very significant tax reform, as has been said by others. What is your feeling about the extent to which it replaces the fuel tax? Clearly, it does not replace it completely. Therefore, if the Government wish to close the gap that is going to be created by people moving to EVs, what is going to have to happen to the EV tax going forward in order to minimise the tax loss to the Treasury?

Stepping back, there are two problems that are worth bearing in mind. One is that fuel duty revenues are declining, and the Government will have to either cut spending or raise taxes. In principle, you could do that in many ways. You could just raise income tax or VAT. Why is it that we might want to increase taxes on driving in particular? It is because there are other costs associated with driving. For electric vehicles, and driving in general, the big cost is related to congestion. There is a bit of cost from wear and tear, but, if you wanted to do wear and tear, you would put a tonnage tax on heavy lorries. They are the ones creating the problems. It is a congestion problem. That is the reason to have a tax that is on driving in particular, rather than just a generic tax rise. Credit to this Government for doing something. We have been saying for a very long time that you need to do something, and that there is a reason to put a tax on electric vehicles, because they contribute to congestion. The fact that it is a flat tax of 3p per mile means that it is not very well targeted at congestion. Most miles driven do nothing for congestion, and a very small share of miles have a huge effect on congestion, so there is a case for moving towards more of a congestion-related tax. This is not that. Again, credit to the Government for doing something and for putting a tax on electric vehicles when other people have shied away from doing something like that.

Can I briefly add to that? It could be a slippery slope if we have now gone for the 3p per mile, which is too low and is not related to congestion. If that sets the precedent that we are never going to have a congestion-related tax, it is, again, a huge missed opportunity, especially because the penetration of EVs right now is still quite low. You could have a deal with EV owners to say, “We will give you, as we do, some subsidies and various other benefits, but, in return for that, we are going to charge you based on time and the congestion that you create”. You could do that now. You will not be able to do it when everybody is driving an EV. You could still do it, but, politically, it is going to be a lot harder when the penetration of EVs is a lot higher. Again, if this is now taken as, “We have solved the problem”, that creates a future problem that is even bigger.

Just to add one more point, it is also the case that whether or not you will pay significantly less to drive an electric vehicle than a fuel car will now depend a lot on whether you are able to charge that car at home or whether you have to use a public charger. We need to understand those differentials more because they now look quite significant.

As a brief final comment, is the summary of what you are saying, Professor Allas, that there is a missed opportunity to introduce a more comprehensive road pricing system rather than just have a new tax?

“Comprehensive” may not be the right word, but, in a broad sense, yes. It needs to be more targeted in the sense that it targets the costs that Helen was talking about, by far the biggest of which is congestion. It will, therefore, be more effective and efficient in allocating resources, and people will respond to that in a way that means that we then spend less money on dealing with congestion and having to increase our capacity.

Ms Curtice, was the abolition of the two-child limit the most effective way to reduce child poverty, both in terms of impact and value for money?

We looked at a range of options in our analysis for alleviating child poverty, and lifting the two-child limit in full, as the Government have done, was the most cost-effective in the sense of amount of spending versus impact on poverty. We agree with the Government that it will lift around 450,000 children out of poverty by the end of Parliament.

Was it the most well targeted for those in the worst deprivation? I know that it pushes the greatest number over the 60% threshold, but was it the best means of helping those who are the very most deprived?

Compared with all of the options, I do not recall exactly, I am afraid. The biggest impact on the most deprived is probably on those also impacted by the benefit cap, which has not been changed.

Professor Kitty Stewart and Kerris Cooper of the LSE found that children from low-income households do less well in life due to low income, not due to other factors. Does it necessarily follow that, first, reducing child poverty helps children do better in life, and, secondly, removing the two-child limit and addressing child poverty could pay for itself in the longer run, because the children have better life outcomes, as that research shows, and so they pay taxes and have fewer demands on the health service and other public services and so on?

It is clear that there is evidence that growing up in a low‑income household has lifelong effects, and I would hope that there are, therefore, significant benefits in the future from the action that the Government have taken. Equally, I am supportive of the action that the Government have taken also because of the impact on those children right now. I would not claim that this is a measure that necessarily pays for itself. It is something that we should do anyway.

On a moral ground, as an MP with high levels of child poverty in the seat, I agree.

If I can just add one thing to that, there are moral reasons for doing this, but it is very unlikely to pay for itself. You would have to believe that it was going to have either a very big effect immediately on things such as healthcare for those children, or a big effect on earnings later in life. IFS did a piece of work, which we put out fairly recently, looking explicitly at the effect of the two-child limit on children. We have data on these children who have been affected by the two-child limit. We can look at what happens to the performance of those children at the age of five, and the answer is absolutely nothing. If you measure at the age of five how many children are meeting the Government’s definition of a good level of development, having been affected by the two-child limit has no effect on that. That does not mean that there are not effects later in life. There may be, but we cannot see the data on that yet. It does not mean that you should not do it for other reasons, but we should not expect it to necessarily have broader effects that are so big that they will pay for themselves. Looking more broadly at the international evidence, where there are reforms for children that have gone on to pay for themselves in the long run, it is more likely where they are very targeted at educational outcomes of those children, or at health interventions, rather than just cash. That is not to say that you should not do it, but the evidence that we have so far on the two-child limit says that it has no effect on the educational outcomes of children at the age of five.

I am going to cover three completely unrelated topics, if that is all right. I will start by asking Ms Miller from the IFS about business rates. For so many months, businesses—and particularly high street businesses—have been told that there was going to be a new, permanently lower rate of business rates brought in at the Budget. A lot of businesses are now looking with a great deal of shock at some of the rates that they are going to have to pay. I understand that, on average, rates for hotels are going up 76%, pubs 30%, and restaurants 14%. Is that your understanding as well? Where are the winners in this policy? I do not think that anyone would describe that as “permanently lower rates”.

I have not looked at the sector splits or done the analysis to work out the percentage increases for each of the sectors. My understanding is also that the Government did not deliver what people were expecting, and that it was not such a big cut as expected for retail and some business. Stepping back, I cannot resist the urge to say that business rate policy has been confused for quite a long time. There is a misconception about the problems that are being caused by business rates. The perception that business rates are killing the high street is not true. Business rates are, in part, the best tax that we have in the sense that it is partly a tax on land values. Taxing land values economically is an efficient thing to do. It does not distort decisions. It is partly a tax on business inputs, and that is where the problem arises, because, if you tax a business input, you get fewer business inputs. Stepping back, imagine the Government doing, basically, a permanent giveaway to some subset—pubs, or retail, low-value properties. I would expect—and evidence bears this out—in the medium run, which could be quite soon, that to be reflected in rents and, basically, to be a giveaway to landowners. If you do measures that give some group—retail, hospitality or pubs—temporary lower business rates, while rents are fixed, you are temporarily benefiting that business. Once rents can move, you should expect to see it reflecting rents and for it to be a giveaway to landowners. Maybe you want to do giveaways to landowners, but that is not usually how these policies are described and motivated. This is a case where what I would urge the Government to do is what we have been saying for decades at the IFS. What we need to do is move towards a land value tax, which you can do in different ways, and tax the underlying value of the land and take the value of the property out of all the tax, whether you are a supermarket, a warehouse, a pub or whatever else.

Moving on to my second topic, if I may, are we saving enough in this country for pensions?

The answer varies across different people. For some people, clearly the answer is yes and they are absolutely fine.

My question is about the aggregate. Is the country saving enough for later life in aggregate?

It is not an easy question to answer.

There are some groups who look at the risk of under-saving for retirement. There are some people who look like they are going to have an absolutely fine retirement. I do not know how you aggregate that.

No one has done any work on aggregating it. In terms of the salary sacrifice changes, which were the second biggest tax increase in the Budget, my understanding is that the people who will be most affected by that are those who pay the highest national insurance, which would be those earning between about £10,000 and £50,000, because they would be paying the 8% and would miss the benefit of not having to pay that, and it is less of a tax hike on people earning more than £50,000. Have I understood that correctly?

In terms of the marginal rate that they are paying, yes.

So this salary sacrifice is pretty tough on middle earners.

It depends a bit on how you think about it, because the extent to which someone is able to afford to save more than the cap of £2,000 also varies.

Have you done any work on what the distribution is of the people who do participate in these schemes?

To illustrate that, if someone is making the standard 5% contribution, they would have to earn over £45,000 or £46,000 in order to be exceeding that £2,000 cap.

If I can add, 32% of contributions are made by individuals who earn more than £100,000. They are 3% of employees but 32% of the contributions, so the overall distribution will be highly progressive. Less than 32% will come from the £100,000 group, but not much less.

Presumably, there will be people earning less than £50,000 who are caught by this.

Yes, absolutely, and Ruth is absolutely right that, if the marginal rate that you now face is 8%, 8% is higher than 2% and, therefore, that is true, but lots of people who are in that basic rate bracket will not be making enough contributions to be over the £2,000. The bulk of people who are making the over £2,000 contribution are those who are on higher earnings.

Turning to my third topic, which is around the net migration numbers that the Office for Budget Responsibility has put into its forecasts, there has been a lot of anecdotal commentary in the media about the fact that there are a lot of people leaving the UK. There does not seem to be any data out there about how much tax those people who have now left the UK were paying. I wondered if any of your organisations had any data on that or whether that is something that the ONS ought to be collecting.

We do not have better data than the OBR, I am afraid.

One of the changes that was made in the Budget was around rowing back on some of the previous changes to the non-domicile tax regime. Do you have any understanding as to why the Chancellor would have done that? Is that to try to prevent an exodus of non-domiciled individuals? Does anyone have any data on that?

As I understand it, it was a small tweak, which Helen may understand better than me, in terms of the ability to share that allowance. As the OBR said yesterday, it is not yet clear whether the number of people leaving as a result of the previous tax measures is higher or lower than what the OBR had already assumed. The only thing that I would add is that there was an assumption within the costing for those measures that it would cause some people to change their residency.

Would you support us finding out a bit more information about whether the people who are leaving the country were people who were significant taxpayers?

I am sure that it is something that we would all like better data on. It takes time to collect that data.

IFS might do more work on this in the future. We have some of this information. The Migration Advisory Committee is doing some good work on this. What you want, in some sense, is fuller information about people. You want to know when they came, what they did when they came, how much they earned, what they were contributing, who their broader family was, and who was leaving. Basically, there are different effects happening. You want to know who is coming and who is leaving—that compositional effect will matter a lot—and then, when they are here, what their trajectories are. That is going to matter a lot. Are you looking at immigrants who are coming into the health and social care sector, for example, or at French bankers? We have seen big changes over time in terms of fewer people coming from the EU, more people coming from outside the EU, and people staying longer. Those who stay longer tend to be more assimilated into the UK, and that leads to higher earnings and higher tax payments, but they are more likely to have children here and so on. There are lots of factors going on. We love data, and we would all love better data on that.

It sounds like we are basically driving without any information in the rear view mirror here.

I do not think that we have no information. There is some information out there. We would all like more information. When you start to look at very small subsets of migrants—and the non-dom group are a teeny, tiny subset of overall migrants in the UK—it is always hard to get a read on how they are going to respond, because what a small handful of people do can matter. As we get more information, just as we have to wait and see what happens in some sense, we will be able to know more.

But we will not know whether this measure has closed the stable door in time. Is that fair to say?

I have not looked in detail at what the OBR is saying about this particular tweak to the measure. It is always hard. Whatever they say, they will know that there is a huge uncertainty band around this. At this point as well, non-doms will not be just responding to exactly what has happened and exactly what has changed. They are making expectations about what is going to happen and whether more is going to come. Maybe they have already made plans, and they would have planned differently had this been changed, but they will not now. There are just going to be lots of things going into those decisions.

William Hague has pointed to a number of measures in the Budget around changes to VCTs and EIS limits, and to matters around knowledge-intensive companies. He suggested that those will have a positive effect. Have any of you done any work on quantifying the likely value of those changes to the economy?

We have not done any quantitative analysis, but, qualitatively, supporting scale-ups is part of supporting that creative destruction process that I mentioned earlier. It is allowing innovative businesses to come and create value, and to take market share from businesses that maybe were doing things not so efficiently or not in a modern way. Broadly speaking, there are likely to be positive effects. Looking at the numbers here, these were still quite small in terms of the total effect that they will likely have over the period of the Parliament, so whether it will show up in the accurate numbers is really hard to tell.

There is not a straightforward answer. As one indication of that, I made some notes coming into this, but for a different reason, about the pros and cons. I literally have a page and a half of lists of pros and cons of different measures. Partly, they go in different directions, and are slightly good for some companies and less good for others. Stepping back from that, rather than walk you through all the different pros and cons, what I would say is that this is a part of the tax system that is complex and changes a lot. There are lots of acronyms here—EOTs, EMIs, EISs and VCTs. There are just lots and lots of them.

EIS, SEIS and VCT have hardly changed at all. They have been stable for several years. EOTs, or employee ownership trusts, have had their tax advantage halved, but they have been stable for a long time. Is it really fair to say that they have been changing a lot?

They have changed a bit. It is good news for us that they have changed a little bit, because one of the things that we are doing at IFS is using some past policy changes to try to work out how much of an effect they have on who starts a business and how those businesses progress. You are right that they are not the worst part. They have not changed too much. They are changing now, but in ways that are going to have different effects. Changes aside, there are lots of these schemes. They interact in different ways. They affect different people. It is quite complex. That is why I have to carry a list around with me to remind myself of who gets what.

We thought that you and Mr Glen were the only two people in the universe who knew it off by heart.

I would not trust my remembering them, because they are so complex and there is variation across the schemes. There is a case for stepping back and saying, rather than just taking these schemes and tweaking them a bit around the edges, “Who is it we want to be incentivising? How do we want to be incentivising them? Do we really need this many schemes or could we have a smaller subset of schemes? When do you want to give tax relief?” For example, it is good that they have reduced the capital gains tax relief for employee ownership trusts. I would argue that it should be zero relief as opposed to just half of the current relief, because giving relief to successful businesses that get capital gains is not a good way of incentivising new businesses. The point is that we need a more holistic look at, “What is this system doing? When do you want to give different types of tax relief to different types of companies?” I agree that scale-up is important, and not just start‑up, but these are tweaks around the edges of a system that we need to look at properly.

I would just say this. I would be mindful of having a completely desk-based economist’s view of this. Look at the behaviour of The Entertainer. It sold its business at a lower multiple of what it could have got if it had sold it to somebody else. It did that so that it could preserve ownership for the people who had worked in the business for many years. There are incentives that accrue because of those advantages. I totally take the point about simplification, but change and uncertainty of change also has a behavioural effect, and people in some of these businesses at an early stage can move overseas, surely.

I absolutely agree with that. We should be careful about stability, which is why, rather than have a Budget like this, where it is tweaking, you first need to work out, “What are you trying to do? What do you want to incentivise?”, and then move towards that. This is not me sitting here guessing how people are going to respond. What we are doing literally at the moment is taking all of the HMRC data on all the businesses, and working out who is responding and how they are responding to these, in order to provide the evidence base that allows us to design a better system.

That is very interesting. We would be interested in seeing that. We are at the end of our session, so can I thank our witnesses, Professor Tera Allas, Dr Peder Beck-Friis, Ruth Curtice and Helen Miller, very much indeed? The transcript of this session will be available on our website, uncorrected, certainly within the next couple of days, so do have a look at that. I want to thank you very much indeed for your time. Our next session is with the Bank of England on Tuesday, and then we have the Chancellor of the Exchequer with us on Wednesday 10 December. Thank you very much indeed. [1] Professor Allas has pointed out that she was referring to annual productivity growth in both cases of this sentence.