Budget 2025: Ed Conway explains who benefits and whether living standards are improving

Key Concepts

• Post-Budget Analysis: Examination of budget outcomes and impacts by think tanks and financial institutions.
• Office for Budget Responsibility (OBR) Forecasts: Projections by the OBR regarding economic performance, deficits, and productivity.
• Government U-turns: Reversals of previous policy decisions by the government.
• Fiscal Deficit: The difference between government spending and revenue.
• Borrowing: The amount of money the government needs to borrow to cover its deficit.
• Taxation: Government revenue collected from individuals and businesses.
• Giveaways/Spending: Government expenditure on benefits, services, or tax reductions.
• Frozen Allowances: Tax thresholds or allowances that are not increased in line with inflation, effectively acting as a tax rise.
• Progressive Budget: A budget where the tax burden is higher on higher earners and benefits are more directed towards lower earners.
• Mansion Tax: A tax on high-value properties.
• Living Standards: The overall well-being and economic prosperity of households, often measured by real household disposable income.
• Real Household Disposable Income (RHDI): Income available to households after taxes and transfers, adjusted for inflation.
• UK Government Bonds (Gilts): Debt securities issued by the UK government.
• Market Reaction: The response of financial markets to government policies, often reflected in bond yields.

Post-Budget Analysis: The Numbers and Their Implications

Following the budget documentation, the day after the budget is dedicated to post-match analysis. Think tanks like the Resolution Foundation and the Institute for Fiscal Studies (IFS) scrutinize the budget's figures to determine if the numbers add up and to understand the underlying economic realities.

OBR Forecasts vs. Actual Outcomes and Government U-turns

A significant point of discussion was the Office for Budget Responsibility's (OBR) revised productivity forecasts. In the run-up to the budget, there was considerable talk that these revised forecasts would lead to higher deficits, necessitating tax rises, potentially including income tax. However, the actual numbers reveal a different picture.

• OBR Impact: The OBR did acknowledge that the economy was not performing as well as expected, leading to higher projected deficits in the coming years. The visual representation of this impact (referred to as "bars") shows a notable contribution to the deficit in the 2029-30 period.
• Government U-turns: Crucially, the analysis indicates that government "U-turns" – reversals of previous policy decisions, such as changes to winter fuel payments and other unspecified measures – actually increased the deficit by more than the impact of the OBR's revised forecasts.
• Argument Against Government Narrative: This finding directly challenges the government's narrative that the increased deficit is primarily due to external factors like Brexit or the previous government's policies. The data suggests that the government's own policy reversals are the main drivers of the current deficit increase.

Funding the Deficit: Borrowing and Taxation

The budget aims to fund increased spending through tax rises. However, the timing and nature of these measures are critical.

• Increased Borrowing in Early Years: The analysis highlights that in the initial years, the budget leads to more borrowing, contradicting any claims of reduced borrowing. This increased borrowing is only offset by additional taxes in the final year of the projection.
• Election Year Conundrum: This timing is problematic because the final year coincides with a potential election year. The prospect of significant tax increases impacting the public just before an election raises questions about the government's actual intention to implement them.

Impact on Households: Distributional Effects of Policies

The budget's measures are analyzed for their impact on different income groups, from the poorest to the richest.

• Frozen Allowances as a Major Tax Rise: The most significant tax rise identified is the freezing of tax allowances. This means that as incomes rise, individuals pay more tax because their allowances are not increasing in line with inflation. This measure disproportionately affects higher earners, as they pay more tax in absolute terms.
• Giveaways and Their Beneficiaries:
  • Scrapping the Two-Child Policy: This policy change represents money going into people's pockets, with the lowest-income households being the primary beneficiaries. Upper-income households, in contrast, are mainly paying more in taxes.
  • Energy Bill Reduction: A universal measure providing money off energy bills, benefiting everyone across the income spectrum.
• Mansion Tax: The "mansion tax" is noted as having a minimal impact in terms of revenue generation. While it affects some high-income households, its overall fiscal contribution is small.
• Net Impact: A Progressive Budget: When all measures are considered, the budget is characterized as a "takeaway" for the wealthiest families (more money going out of their pockets) and a "giveaway" for poorer families (more money coming into their pockets). This leads to the conclusion that the budget is progressive, taking more from the rich to give to the poor.

The Concentration of the Mansion Tax

Further examination of the mansion tax reveals its highly localized impact.

• Geographic Focus: Approximately 70% of homes valued at over £2 million are located in London and the Southeast of England.
• Hyper-Concentration in London Boroughs: A striking 23% of all sales of properties over £2 million in recent years occurred in just three London boroughs: Kensington, Chelsea, Westminster, and Camden. This indicates that the mansion tax's direct impact is heavily concentrated in these specific affluent areas.

Living Standards: A Low Bar for Improvement

The government's pledge to increase living standards is examined in light of historical data.

• Definition of Living Standards: Living standards are measured by real household disposable income (RHDI), reflecting how much better off households feel each year.
• Past Performance: The last parliament, which included the pandemic and the energy price shock, saw a significant decline in living standards, with households becoming worse off.
• Future Projections: While the OBR data suggests a positive trajectory for living standards in the current parliament, the analysis points out that this improvement is from a very low base.
• Historical Comparison: When looking back to 1955, the current parliament is projected to be the least bad parliament for living standards, meaning that while technically meeting the government's rule of improvement, it sets a "very low bar."

Market Reaction: A Positive Verdict from Investors

The reaction of financial markets to the budget is a key indicator of investor confidence.

• Historical Context: Previous budgets have seen mixed market reactions. The "mini-budget" led to a significant rise in borrowing costs due to investor nervousness. Rachel Reeves's last budget also saw an increase in gilt yields, indicating market concern about the lack of fiscal headroom.
• Current Budget's Impact: In contrast to previous instances, the UK government bond yields have decreased following this budget.
• Interpretation of Market Movement: This downward trend in yields is interpreted as positive news. It suggests that investors are content with the budget's proposals and are willing to lend money to the UK at a lower rate of interest.
• Conclusion on Market Verdict: The speaker suggests that Rachel Reeves would likely be pleased with the positive verdict from both think tanks and, importantly, from the financial markets.