UK Budget Offers More Free Child Care as Work Incentive

The British government ramped up its efforts to get more people into work and make Britain an enticing investment destination as it announced on Wednesday an expansion of free child care, extended household energy subsidies and bolstered business investment incentives.

Amid double-digit inflation, rising interest rates and widespread labor strikes, Jeremy Hunt, the chancellor of the Exchequer, detailed his plan to help Prime Minister Rishi Sunak keep the promise he made in January to expand the economy this year and pull it out of stagnation.

Mr. Hunt laid out his tax and spending plans, about 20 billion pounds ($24 billion) a year for the next three years, to lawmakers in Parliament in a budget speech aimed to coax economic growth that has been flat over recent months — while avoiding any surprises that could shake Britain’s restored but fragile fiscal credibility.

“We remain vigilant,” Mr. Hunt said on Wednesday. “I will not hesitate to take whatever steps are necessary for economic stability.”

As he was speaking, junior doctors who work for the National Health Service, transit workers, some civil servants and teachers were on strike, adding to a wave of labor unrest that began last year over higher pay. The chancellor mostly avoided the subject of public-sector pay, saying the government would “work hard” to settle the disputes, but he didn’t announce any details.

Mr. Hunt was named chancellor in mid-October, during the turmoil of Liz Truss’s premiership, in a bid to calm financial markets roiled by Ms. Truss’s plans to cut taxes and raise spending. After scrapping almost all of Ms. Truss’s economic agenda, he was kept in his position by Mr. Sunak. Both men have since focused on being seen as competent and, frankly, boring, compared with their predecessors.

The economic outlook in Britain, as in many other advanced economies, has improved in the past few months because of lower wholesale natural gas prices and some surprising resilience by consumers and businesses.

On Wednesday, the independent Office for Budget Responsibility raised its forecasts for the British economy for this year and next. It predicted that gross domestic product would fall 0.2 percent this year and that the economy would avoid a technical recession, defined as two consecutive quarters of economic contraction. It’s a significant improvement since November, when the agency predicted that he economy would decline 1.4 percent this year.

But the economy is currently stagnating, and disposable income, adjusted for inflation, is still forecast to fall by the largest amount in records going back to the 1950s. The outlook further ahead is also weak, as economists lower their expectations for growth in the labor market and Brexit continues to hamper many businesses. The Office for Budget Responsibility reduced its forecasts for growth for three years beginning in 2025.

Mr. Hunt’s commitment to reducing Britain’s debt as a share of its gross domestic product left him with little space to make big changes to taxes and spending. And none appeared. Increases in personal income taxes are continuing, which will pull 2.5 million people into higher tax brackets over the next five years, and government department spending was hardly touched.

“The budget contains the faint outline of a plan” to improve supply in the economy with more workers and investment incentives and “lift the economy’s dismal medium term growth trend,” Michael Saunders, an economist at Oxford Economics and former Bank of England rate-setter said in a note. “But these are only a first step.”

Mr. Hunt announced a slew of spending plans, which will cost £7 billion a year by 2027, focused on his goal of getting “hundreds of thousands” more people into jobs, particularly targeting parents, people over 50 and recipients of state benefits. There is growing concern in the government that lower work force participation since the pandemic is holding back the British economy, as people take early retirement and are sidelined by the rising numbers cases of long-term physical and mental health conditions. Nearly half a million more people are economically inactive since the pandemic, with two-thirds of them over 50.

Among the biggest changes in his address, Mr. Hunt said workers would be able to save more money in their private pensions without incurring taxes. The change is meant to encourage people to work longer, particularly high earners, such as senior doctors in the National Health Service.

While economists, such as those at the Resolution Foundation, have said it will be difficult to persuade financially comfortable early retirees to return to work, the government could enlarge the work force by improving access to affordable child care, occupational health and other disability support.

The government has heeded the call for more child care. Previously, the government offered 30 hours of free child care per week for children 3 to 4 years old of working parents, which meant most parents of younger children needed to pay for child care if they wanted to work. The plan outlined Wednesday would, over the next few years, steadily expand free coverage to children ages 1 and 2 years, beginning at 9 months.

The Women’s Budget Group, a think tank, welcomed the additional care but warned that it was “concerned about the challenges for delivering the expansion.” It said the government needed to make clear how it would recruit and pay for child care staff. Almost half the workers in this sector rely on state benefits to supplement their income, the group said.

Mr. Hunt announced earlier in the week some other steps to tackle what he called Britain’s “economic inactivity problem,” including changes to the way child care costs are paid to people receiving state benefits, revisions to how people with disabilities are assessed for work and additional money for skills training for people over 50.

The Office for Budget Responsibility said it expected the measures outlined by Mr. Hunt to encourage 110,000 more people to join the work force over five years.

In his speech, Mr. Hunt said the government would proceed with raising corporate taxes in April to 25 percent from 19 percent. But he said companies would benefit from tax relief made on investments, including allowing businesses to deduct the full cost of certain plant and machinery from their profits before tax.

Early on Wednesday, the Treasury said it would extend the government’s subsidy for household energy bills by three more months, until the end of June, capping the average annual cost at £2,500.

The budget presentation was nearly overshadowed by the collapse of the California-based Silicon Valley Bank late last week, which brought down its British subsidiary, a major banker for Britain’s tech companies.

Earlier this year, Mr. Hunt said he wanted to “turn the U.K. into the world’s next Silicon Valley,” but many start-ups said over the past weekend that they were at risk of not being able to pay payroll and other expenses and could quickly become insolvent themselves. The chancellor and other Treasury officials spent the weekend locked in talks trying to avoid putting the British subsidiary into insolvency. In the end, HSBC, Europe’s largest bank, bought the subsidiary of for a symbolic £1.

2023-03-15 20:37:01