Impact of Hunt's childcare plan highly uncertain - IFS

The Budget was a case study in optimism. Jeremy Hunt is delighted inflation is going down and the economy looks set to grow.

But scratch beneath the surface – and there are questions about how much we'll all feel it.

For example, the level of taxes we pay is going up to its highest in decades.

At the same time, the Office for Budget Responsibility predicts a big fall in living standards, with disposable income falling by 5.7 per cent in two years.

Labour aren't saying whether they’d make different decisions on personal tax.

Instead, they are saying they want levels of tax on working people to be "as low as possible".

But they are criticising the decision made to remove the cap on tax-free pension savings. Labour say they would reverse it – and have a specific scheme for high-skilled doctors.

The government, however, says it wants a scheme that can be introduced quickly and deliver results.

A bit more detail now on what impact the Office for Budget Responsibility expects the childcare measures to have on the economy.

The OBR, an independent body which analyses UK public finances, says the expansion of free childcare is the section of the Budget that will have "by far the largest impact" on potential output.

It says that it expects the measures will "gradually increase labour market participation" of parents with young children.

By the 2027-28 fiscal year, it says it expects around 60,000 to enter employment and work an average of around 16 hours a week - in line with the average for part-time workers.

As we've been reporting, the IFS - an independent economic think-tank - has assessed the impact of the government's expansion of free childcare on the labour force as "uncertain".

In response, the Treasury says that tens of thousands of people are estimated to be brought into the workforce as a result of the plans, citing Office for Budget Responsibility forecasts.

“The independent OBR have said that the measures in this Budget caused them to revise GDP upwards by the largest amount ever in their forecasts," a Treasury spokesperson says.

“They also say extending 30 hours of free childcare to parents of nine months to two-year-olds is estimated to bring 60,000 more people into the workforce, particularly women, and will lead to many more increasing their hours – helping to grow the economy and raise living standards for everyone."

What does the Spring Budget mean for the economy, and for you?

The BBC’s Adam Fleming and political editor Chris Mason dissect the Budget with Claer Barrett, Financial Times columnist and host of the FT’s Money Clinic Podcast, and former Conservative chancellor Ken Clarke.

Click here to listen to the episode

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As promised, here is a summary of what we've heard from the Institute for Fiscal Studies today. They are an independent economic think-tank and always analyse the Budget (though they are not the only group that have a view).

They've said:

• The two biggest changes are an increased childcare entitlements for one and two-year-olds and corporation tax rise
• The Office for Budget Responsibility forecast is more positive than the Bank of England forecast
• Lost decade of living standards - inflation will come down but prices will remain higher than two years ago and earnings have not caught up. The OBR describes the next two years as the "worst on record" for household income

• Childcare - described as a "new branch of the welfare state" benefitting parents who are in work and on higher incomes - and therefore more likely to spend money on childcare expenses - more than the families on lower incomes
• But the impacts of the policy on the labour market are "highly uncertain"

• Government departments could face big cuts to fund increased funding to childcare and defence budgets, including local government, further education, courts and prisons

• The UK is becoming a higher tax economy
• The Corporation tax rise from 19% to 25% means UK moving from one of most competitive in the world to the "middle of the pack" - but still lower than any other G7 country
• Revenue as a percentage of GDP created from corporation tax rise will reach its "highest ever level"
• Pension changes could go either way - unclear whether it would increase labour force as it could mean people reach savings goals quicker so work less

Thank you for joining us over the last hour and a bit as the Institute for Fiscal Studies gave their thoughts on yesterday's Budget.

We'll bring you a wrap of it shortly and will continue to bring you any key lines.

But now, we're going to bring you some Budget analysis from our colleagues at Reality Check.

Tom Waters, a senior research economist at the IFS is up next and talks about reform to health-related benefits.

He says the changes to health-related benefits, which will remove the link between a person's ability to work and their eligibility for benefits, is aimed at strengthening incentives to work.

But he adds that a "large proportion" of the affected group have already been assessed by the government as not being capable of working, so some who are on one form of benefit may lose out.

Delestre now moves on to talking about corporation tax.

He says there has been a long-term pattern of rate cutting in the UK over the years, but with the planned rise from 19% to 25%, the country is now moving from being one of the most competitive in the world to the "middle of the pack" - though still lower than any other G7 country.

He says the revenue corporation tax will create as a percentage of GDP will reach the "highest ever level" by the end of the forecast period.

He notes that with planned rises to corporation tax there will be concerns that it could dampen investment in the UK. Delestre adds Hunt has countered this by introducing a temporary increase to tax allowance on investments for the largest companies.

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Delestre says the chancellor’s changes to lifetime and annual pension allowances are costed at £1.3bn a year, but quite a bit less in the longer term.

The chancellor will be hoping the move increases labour force participation.

Delestre says it could go either way – it could mean people work more to take advantage of tax breaks, but it could also mean people reach their savings goals quicker, so work less.

The Office for Budget Responsibility thinks the former effect will be bigger, with the workforce increasing by around 15,000.

We are now hearing from research economist Isaac Delestre.

The freezing of income tax and national insurance thresholds is going to “bite hard” given the current level of inflation, he says.

As Paul Johnson has already highlighted, basic rate taxpayers can expect to pay an increase of £500 between this year and next. For most higher-rate taxpayers, it’s about £1,000.

Delestre says that will see about 1.7m people brought into the income tax system, and about 1.2m people paying higher rates than they otherwise would have done.

Emmerson is now talking about risks to the forecasts - including public sector pay.

He says offering deals that match private sector pay increases would mean the government would need to find up to £5bn more.

The plans after 2025 are also looking "really tight" due to spending commitments the government is making for after the next general election, while total spending is not increasing.

So areas like local government, further education and the courts and prisons could face cuts of about £18bn to fund things like the extension to free childcare and defence budget increases.

Emmerson looks next at what government borrowing means for government debt.

Might the chancellor have more wiggle room in future, by the time of the next election, he asks?

"Many of the pressures we see at the moment are likely to persist and as a result, it's not very likely that it will be easy to get debt falling later in the decade".

He goes on to say the government is "spending more on debt interest, making things more difficult for the chancellor".

We are now hearing from Carl Emmerson, a deputy director at the Institute for Fiscal Studies, which analyses the Budget every year.

He is showing a graph on taxes, and says we are moving to a higher tax economy with the highest tax burden in decades - up to a level the UK has never sustained before.

Johnson warns that during the next year households will continue to feel pain.

While inflation will come down, prices will remain much higher than two years ago, and earnings haven't caught up.

He calls it a "lost decade" for living standards, and says the government's independent forecaster's optimism on the economy may not be widely shared for a little while yet.

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Johnson says there has been "no discussion" on public spending.

He says spending on childcare and defence budgets have gone up, but less is spent in other sectors.

He asks what are the plans for public sector pay, and says money for this will have to be found from somewhere.

Johnson says the decision to end work capability assessment for disabled recipients of universal credit is a "potentially radical policy" but also a "risky one".

He says hundreds of thousands of workers could lose personal independent payments in the new system and there was a long way to go in getting the design of this policy right.

Households will feel "continuing pain" over the coming year with incomes being squeezed despite falling inflation, Johnson warns.

He estimates the freeze of income tax and national insurance allowances and thresholds will cost most basic-rate taxpayers £500 next year and most higher-rate payers £1,000.

"The OBR may be relatively optimistic about the medium term, but it still thinks these will be the worst two years on record for household incomes," he said.