5th March 2024
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Measures to encourage people back to work will have limited impact and cost nearly £70,000 per job, according to the government’s economics watchdog.

The Budget included a £7bn package to boost labour supply, including tax breaks to encourage wealthy pension savers to stay in work for longer.

Free childcare provision is also being expanded so parents can return to work.

The changes will bring around 110,000 people back to work, according to the Office for Budget Responsibility (OBR).

The OBR is responsible for analysing the impact of the Budget on the UK economy. It said economic growth would be stronger than was forecast in the autumn, based in part on more people returning to work.

But Paul Johnson, director of the Institute for Fiscal Studies, an independent think tank, described the OBR’s prediction of just over 100,000 people going back into employment as “modest”.

“That would be just a fraction of the number lost from the workforce in the last couple of years,” he said.

“It is dwarfed by annual net immigration numbers assumed at 245,000,” he added.

“The OBR reckon the overall labour supply package will cost around £7bn a year and increase employment by around 110,000. That’s a cost of nearly £70,000 per job,” Mr Johnson said.

A government spokesperson 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.

“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,” the spokesperson added.

‘Poor value’

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

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.

The measures may instead encourage people to retire early, the think tank said.

The government’s independent forecaster said the plan could boost employment by 15,000, a fraction of the UK workforce.

The chancellor said it would keep more doctors in work, helping the NHS.

But Labour’s shadow chancellor Rachel Reeves described the scheme as a “£1bn pensions bung for the 1%”.

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.

  • How are pension rules changing?
  • Pensions to get boost as tax-free limit to rise

However, the Resolution Foundation said the plan was “unneeded” and the benefits had been overstated.

It added that it would cost around £80,000 per extra worker, and that 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.

The Institute for Fiscal Studies echoed the concerns, saying the move “probably won’t play a big part, if any, in increasing the number of people in work”.

And Labour vowed to “reverse” the plan if it wins the next general election and replace it with a scheme 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.

Related Topics

  • Personal finance
  • Jeremy Hunt
  • Pensions
  • Budget 2023

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