Budget back to work plan ‘to cost £70,000 per job’on March 16, 2023 at 4:17 pm

Budget plans to encourage people back to work will have limited impact and cost £70,000 a job, a think tank says.

The changes are expected to bring 110,000 back to work, which the Institute for Fiscal Studies said was “just a fraction” of the those who’d left work over the past two years.

The government will spend billions to boost labour supply via tax breaks on pensions and expanded free childcare.

It said the plans would help to grow the economy and raise living standards.

Paul Johnson, director of the IFS, said the government’s forecaster had calculated the overall plan to boost workforce numbers will cost around £7bn a year and increase employment by around 110,000.

“That’s a cost of nearly £70,000 per job,” he says.

While the chancellor “might have some success” it was likely to be modest given the large number of people “lost from the workforce in the last couple of years”, he added.

UK economic growth has flatlined in recent months and the economy is expected to shrink his year. About a quarter of people of working-age – around 10 million people – do not have jobs.

Persuading workers to work for longer is part of UK plans to boost growth, with Chancellor Jeremy Hunt’s Wednesday announcement on tax and spending being dubbed the “Back to work Budget”.

Mr Johnson said the impact of annual net immigration numbers – assumed at 245,000 – would be far more significant for boosting employment.

The government said the OBR had revised its outlook for economic growth upwards “by the largest amount ever in their forecasts” as a result of the Budget’s measures.

A spokesman added: “[The OBR] also says extending 30 hours of free childcare to parents of nine months to two year olds… will lead to many more increasing their hours – helping to grow the economy and raise living standards for everyone.”

The Budget also included measures to support disabled people who want to work, programmes to encourage retirees to take on jobs or apprenticeships, and changes to the rules around health-related benefits and universal credit.

The pension tax changes, which could cost £1.2bn, have come in for particular criticism.

They are designed to encourage pension savers not to retire early – in particular senior doctors.

But the Resolution Foundation think tank, which focuses on low and middle income earners, described them as “poor value for money” and said they may not work as hoped.

Under the plans announced in Wednesday’s Budget, the tax-free limit for pension savings during a lifetime will be abolished in April.

At present, people can save just over £1m before an extra tax charge is levied.

The annual allowance will remain in place, but will go up from £40,000 to £60,000, after being frozen for nine years. Those who are already drawing a pension, but want to save more will be able to put in £10,000 a year, up from £4,000.

Chancellor Jeremy Hunt insisted the abolition of the lifetime allowance was the quickest and simplest way to solve issues with NHS doctors and consultants, who have been retiring early, reducing hours or turning down overtime for tax reasons.

But tax breaks will only boost employment by 15,000, according to the OBR.

And the Resolution Foundation said giving pension savers “very large wealth boosts will actually encourage some people to retire earlier than they otherwise would have done”.

“It’s a big victory for NHS consultants but poor value for money for Britain,” said Torsten Bell, chief executive of the think tank.

Labour’s shadow chancellor Rachell Reeves said the party would reverse the policy if it wins the next general election and replace it with one targeted at doctors rather than a “free-for-all for the wealthy few”.

It come as the government is freezing general tax thresholds, which will drive up many people’s tax bills.

The move is expected to raise more than £30bn by 2028, the bulk of this coming from taxes on employees’ income.

It will also create 3.2 million new income taxpayers and 169,000 more will have to pay VAT.

Many in the pensions industry say the lifetime allowance has been a barrier to encouraging pension saving. Experts say removing it could mean wealthy people put money away.

There are also inheritance tax implications, which suggests people may put more money into pensions. Any funds that remain in a pension are not subject in inheritance tax.

In addition, if somebody dies before 75, any funds remaining in their pension is also free from income tax.

However, the effect could be limited as savers who believe the lifetime allowance will return under a Labour government, possibly after the next election, may be less inclined to put a lot of money into their pension.