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Podcast | What you should be paying attention to in 2022

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Happy New Year and welcome to series three of the IFS Zooms In!

This week Paul is joined by four IFS experts, Robert Joyce, Helen Miller, Ben Zaranko and Christine Farquharson to discuss the most important issues facing the economy in 2022.

From the rising cost of living, to tax rises in April, an Omicron surge challenging the NHS and an education system making up for lost learning, we'll go beyond the headlines and brief you on the deeper stories you should be paying attention to this year.

Transcript

Paul Johnson:

Happy New Year everyone and welcome to this season three of the IFS Zooms In, I’m Paul Johnson and I’m very happy, for this first episode of 2022, to be joined by four of my collages at the IFS to take a view of some of the big stories that are already hitting us at the moment and will loom large over the coming year.

I’m joined by Christine Farquharson, who is one of our leading experts on education; Ben Zaranko who works on health; Helen Millar, who runs our work on tax; and Robert Joyce, who looks after work on living standards and benefits.

And we’re going to talk about all those things, we’re going to talk about health and education and tax and living standards. And in particular, let’s start off with that issue of the cost of living if we have started the year with any story (apart from whatever might have been going on in number ten during lockdown last year), the story has been about the so-called squeeze on living standards. So, Rob, we’re hearing a lot about that at the moment. What does that mean, what is happening to the cost of living and how much worse are people going to be this year?

Robert Joyce

Well inflation is rising pretty quickly and that’s something that we haven’t been used to seeing for a quite a while now, to give some idea, according to the latest forecast from the Bank of England it expects inflation, annual inflation to reach about 6% by April which is a big focal point in much of the debate right now, in part because that’s when benefits normally, normally increase. But these kind of rates of inflation are going to affect everyone, of course, for example someone on around median earnings, putting that together with some tax increases as well is likely, we think, to have less spending power next year than now. And those on benefits who are reliant on whatever uprating to benefits that occurs in April will find that that doesn’t keep pace with the rise in the cost of living too. So, by default urm benefits go up in line with inflation as it was in September, which is about 3%, but because inflation has then risen to about 6%, that will leave them someway short of maintaining their, their spending power. So, it’s going to be a bit issue in the coming months.

Paul Johnson

And whilst inflation as a whole will be 6% or possibly more according to some forecasts come April, the actual inflation faced by the groups you’re talking about, particularly the people on benefits, it’s likely to be quite a lot higher, isn’t it? Because they spend so much more of their money on energy which is one of the things that is really going up quickly.

Robert Joyce

That’s right, so up to now, it’s actually been the case that the inflation rate faced by different kind of households, given the different things they spend their money on, has remained quite similar, but that is set to change. We’ve had these big, big increases in the underlying cost of energy which has so far been kept at arm’s length of households to a significant degree, because we have these energy price caps imposed by Ofgem. But that cap did increase in October, and it’s set to increase again significantly again in April. So, what we’re probably looking at, according to the current expectations is something like a 20% rise in the cost of electricity to households and something like a 40% for gas. And because the lowest income households tend to spend on average about three times as much of their budgets on domestic fuel as higher income households, that is a bigger deal for them. Quite apart from any erosion of their spending power tends to be harder to deal with if you’re already on a low income. So probably the inflation rate for low-income houses will be more like 7% rather than the 6% overall figure, which will further increase that pressure on their, on their living standards.

Paul Johnson

Yeah, and that implies, with benefits going up as you say by 3%, I mean there’s lots of percentages we’re bandying around here, but that’s a 4 or 5% reduction in living standards for the people on the lowest incomes and the people on benefits, and that’s a really substantial hit to anyone’s standard of living.

Robert Joyce

Yeah, and to give an idea of scale of that in pound terms, that’s going to be upwards of about £300 in real terms, but which they’re worse off this April compared to last April once you factor in that increase in the cost of living. So, it is a big deal simply because you’re already on a low income as these people are.

Paul Johnson

Yeah, and just to put that in context, lots of people here listening to this might not think £300 a year is great deal, but if you’re living on out of work benefits of significantly less than a £100 a week - which is the sorts of level that unemployed people without children are living on - that’s going to be a very big effect indeed.

Now Helen, one of the issues that people are facing, one of the elements of this cost-of-living squeeze is not just the increase in prices that Rob’s been really talking about, but it’s also been, or going to be a big increase in taxes. Now they’re not going to particularly effect the people on the lowest incomes, on benefits, but it’s certainly going to affect the median earner, the, one type of household that Rob was talking about. Just, just remind us what those tax increases are first.

Helen Miller

Sure, there’s probably two things the government did on personal taxes last year, so one was to freeze some thresholds, so in particular the personal allowance (which is the point at which you start paying income tax), and the higher rate threshold (which is the point at which you start paying a higher rate of income tax), are going to be frozen for four years. What that really means is that there are now more people who are dragged into paying any income tax at all, at the bottom, that’s going to really matter, and more people are applying the higher rate of tax. So that’s basically an increase in income tax.  

Then the big thing that happened last year was effectively an increase in National Insurance contributions, that will eventually be called the Health and Social Care levy. So, they’ll be going up, due to be going up from April, so again to give you a sense of scale in pounds numbers, for someone earning £20,000 that’s a tax increase of about £130, for someone on £30,000 that’s a tax increase of about £250. So, perhaps in and of themselves, not awful, but on top of everything else, that’s going to be a noticeable increase in tax bills, at a time when, as we’ve just talked about, other incomes are going to be struggling because of prices.

Paul Johnson

Yeah, and the thing that people will see in their pay packets, is that increase in National Insurance contributions, which means that their take home pay will go down. They won’t see their take home pay go down as a result of the freezing of the income tax allowance, but one of the things that is quite interesting about that is when the chancellor announced he was going to freeze allowances he thought inflation was probably only going to be about 3%. It’s turned out that it will be about 6 or 7%, so that’s actually turning out to be a bigger tax rise that intended. So, give, given everything else that’s going on, I mean should he scrap these tax rises?

Helen Miller

Well, I think it would be a difference between scraping them and delaying them. So, I think scrapping the NICs rise all together so getting rid of the new Health and Social Care levy, would be a really pretty big policy decision because I’m sure as we’ll go onto discuss, the reason they announced that rise was in order to pay for increased spending on health and social care. And I think they’re going to still spend more on health and social care, so if you’re going to do that spending and not have the long run tax increase to pay for it, then something else has got to change. And that would be a really big decision to just say, “were not doing it at all anymore.” What they could do is say, “we won’t have it come in this year.” So, scrap the increase this April and just have it start next April. That obviously you know would ease some of the squeeze that’s coming in this April. That’s fairly expensive, I think they were thinking that the rise would bring in sort of thirteen, fourteen billion pounds, that’s quite a big give away relative to current plans. And of course, if you’re thinking about helping people, it wouldn’t affect all people. So those people who aren’t paying National Insurance at all, and people getting pension income for example on which NICs isn’t levied, don’t really care whether NICs goes up at all, because they’re not being affected. So, even if you delayed the NICs rise, there will still be some people who wanted help for other reasons. So, it probably wouldn’t be an end to the help.

And of course, you could do something halfway so for example you could stop the NICs rise on employee income, but continue with the rise on employer, on an employer side, so you could do a bit of a half-way house, so they could do that, but I think if they were going to do something, they should think about delaying rather than scrapping all together, I think that would be a much bigger deal for the public finances to just say, “were going to scrap them permanently.”

Paul Johnson

Yeah, of course there was a reason that you know no politicians like to bring in tax rises, and the reason that these were announced is because that we are going to be spending a lot more, particularly on health and we’ll come onto that with Ben in a moment. One of the dangers of course with saying you’re going to delay tax rises is that you know, we might have another good reason for delaying them again next year. Not least that it will be a year closer to a general election and an increase in taxes at that point might be quite difficult and certainly unpopular. Indeed, we are in this kind of slightly strange situation aren’t we, in which Rishi Sunak, the chancellor has said, he’s basically in favour of tax cuts, having last year been the biggest tax raising chancellor in a generation. Do you think there’s any, do you think there is any scope for any tax cuts before the next election?

Helen Miller

I think it’s interesting isn’t it, like you said we just had around forty billion in tax increases last year, so bigger increases that we’ve seen since the early ‘90s, a tax burden as a share of national income that’s due to be sort of highest ever sustained level if we carry through with them. And actually, you can quite easily tell a story that says we might need even more tax increases, if you think about how the government might pay for net zero, levelling up, long run aging pressures on the NHS, you can quite easily tell a story that says we need more spending and more taxes to pay for that. So, the context is one in which taxes are going up. Yet the politics as you’ve alluded to clearly is that you know, despite having been a big tax riser so far, he’d like to start being a tax cutter.  

But I can’t see a world in which he is able to cut taxes enough so that overall, he offsets last year and is a tax cutter overall, that would seem to be unrealistic. But I guess I wouldn’t be surprised if for political reasons he tries to find some tax, some saliant personal tax to trim so that he can go into elections saying, “here’s a saliant tax that I’ve cut back a little bit.” So, I suspect, overall, tax cuts are a bit more likely than big tax rises, but it’s certainly a stark change to where we were last year I think, moving from big tax rises to looking at what we’re going to cut.

Paul Johnson

Yeah, I think you’re right, I think the, the scope for urm saying something or other, possibly income tax will be cut in the run up to an election seems to be there. But in the long run was you say the challenges of an aging population and additional health spending and so on means that they will in aggregate at least likely be undone over the following parliament or two.

One last question on tax, Helen, which is going back to this issue around fuel prices going up, and the sorts of policies that are being suggested to undo that. The labour party, with quite a lot of support it seems now I’ve heard from some conservative politicians, are suggesting that he could raise additional money from a windfall tax on North Sea oil and gas producers, as a way of paying for mitigating the impact of energy price rises. How plausible is that, how plausible is it to have a windfall tax on that particular group of companies? What might the effects be? Is it the sort of thing which occurs to you a plausible policy?

Helen Miller

It is worth saying a few things. So North Sea oil and gas is already treated differently. One of the good things for the government’s point of view of that sector relative to other companies is that if you tax it, it can’t really more offshore, it can’t really move to another country, it kind of has to be in the North Sea, so in that sense it’s a bit easier to tax. And we have always taxed it at higher rates than other companies, in fact we cut those rates in 2016 and you could just argue to say, “if we want to raise more tax from the profits of oil producers or gas producers, we could just put up the rates of corporation tax that we charge that sector.” So, before you even get to windfall tax, just put up the rates of tax you charge them, I think that would be something we’ve done in the past and we could do again.

Windfall taxes in particular you know the attraction to them in general is if you can do them, and you can get companies to believe they are actually credibly one off, they won’t happen again, then they’re a good way to raise revenue because they don’t change companies’ behaviours. Companies won’t change their investment plans because they think they can’t avoid the tax and they can’t change it in the future, so they just carry on doing what they’re doing. So, in that sense it could be attractive and clearly there is a big energy price spike now, so the government could try to argue that it really is just a one-off thing, we’ll just do now. Of course, the concern is that we’ll just have higher prices in future, and they’ll just do it again and then of course, the more you do these things, they’re not really windfalls anymore, their ongoing taxes. So, there’s a danger that firms start to expect them to come and then they start responding as if it’s a permanent tax rise. So, I think it’s, it’s tricky but if you can do it, good.

Another issue is whether you only want to target the North Sea. So obviously there could be profits coming out of the people who are digging the stuff out of the ground but there are also profits at other, at other stages in the production, so at the retail end for example. I think it would be maybe harder to pull off a windfall tax there, but you could think more broadly. So, I think the punchline is, yes, we could probably do it. In terms of how much money we’d raise, I think, you know, we could probably raise a fair amount, maybe some low billions - I don’t think you should be thinking about being able to raise enough money to be able to do something like fund a cut, fund a delay in National Insurance contributions for example, I just don’t think there’s enough, there aren’t enough billion washing around there to make it that kind of scale. So, we can get some money, I can see it could be politically popular, but it’s not going to be the silver bullet that just fixes all these problems and pays everyone to be no worse off as a result of the energy price rises.

Paul Johnson

But a plausible policy then and a policy that could raise something noticeable in, as you say, the small billions. Ben, we’ve, I mean we’ve already talked in some senses quite a lot about health. I mean the main reason for the increase in National Insurance contributions coming in in April, which as Helen says is going to transmogrify into the Health and Social Care levy, in a years’ time, is to pay for growing cost of health care and the, actually to a much smaller extent, is intended to pay for social care. So, we’ll come on perhaps a bit to this issue of the longer-term costs of health. But what’s the position of the health service at the moment as we go into 2022?

Ben Zaranko

I think it’s fair to say that the the NHS is in crisis mode at the moment. I think the, the wave of omicron sweeping through the country hasn’t translated into numbers of hospitalisations and in particular ICU admissions that people might have feared at one point, but it is certainly placing pressure on the NHS because this wave is a little bit different from some of the previous ones. For one the NHS at the start of the pandemic basically dropped everything else, it’s dropped everything it could afford to drop and it delayed, it cancelled millions of operations. We’re now at the point where the NHS can’t really do that again, and they’re reluctant to further delay, or further cancel planned procedures because some of those people’s conditions have deteriorated. So, they’re trying to do a lot more alongside treating COVID patients. They’ve also got quite a resource intensive booster campaign going on. And I think crucially, staff are exhausted and lots of staff are just unable to work because they’ve either got COVID, or they are self-isolating. I think those work force shortages are making this wave much trickier to deal with than the NHS would like. So hopefully that won’t last forever, perhaps in a few weeks we’ll start to see things improve. But right now, the NHS is in a very tricky position for sure.

Paul Johnson

And where is it with regard to you know, those things that people really seem to care about? In particular waiting lists?

Ben Zaranko

Yeah, waiting lists are a huge issue and I think they going to remain a huge issue for the next few years. The most recent figures we have from October there were six million people on the waiting lists for NHS care in England, there are obviously more people in Wales, Scotland and Northern Ireland. That’s up from about 4.4 million just before the pandemic, so that’s a big increase – that’s actually smaller than we might have expected given how much missed activity there’s been, given how many fewer people have come forward to NHS care during the pandemic than we would have expected. So that waiting list they could expect to rise further as more of those people come back and finally end up you know, finally get that thing checked out, finally go forward to their GP to try and get the care that they need but have perhaps been avoiding. So, we could expect that to go even higher. And I think once omicron is behind us, the NHS is very much going to switch to focussing, full throttle on trying to deal with the backlog, trying to get through that waiting list, get it heading down rather than up. And to do so, it’s going to have to do lots of additional activity, you’re going to have to do more than it was doing pre-COVID and more than it was planning to be doing under its previous long term plan, and that’s one of the conditions actually attached to the funding provided to the NHS by the treasury as a result in the increase in, or the creation of the Health and Social Care levy.

Paul Johnson

And that’s one of the, I mean it is one of puzzles, isn’t it, of the, of what’s happening in health at the moment that as you say that, the waiting lists have risen by about one and a half million or something like that since pre-COVID but the number of missed operations, procedures, appointments runs into the many, many millions. It’s a question I suppose of what’s happened to those potential patients. If they do, if lots of them do come back then the scale of the waiting list could become, you know really dramatic over the next two or three years, couldn’t it?

Ben Zaranko

Yes, it could, but that’s a big if and one we just don’t know at the moment. So, as you say, there something like seven or eight million fewer people come forward to join a waiting list during the pandemic than we would have expected. And at the same time the waiting list has gone up by about 1.5 million, and so if a substantial fraction of that seven or eight million do eventually come forward for care, you could be looking at you know, in a worse case scenario, perhaps the waiting list doubling from six to more like twelve million. And these are sorts of scary figures that people are warning about last year. But so far, there are no signs of a hoard of untreated patients finally arriving, banging on the NHS’s door seeking care. And if that continues, if people chose to stay away, perhaps some of the go private, perhaps some of them have learnt to live with their conditions, numbers may never get that high. But I think it’s reasonable to expect they will increase, perhaps quite substantially, but I’d be surprised if they did make it north of say ten million this year. But this is something that NHS leaders will one hundred percent have their eye on and will be monitoring very carefully.

Paul Johnson

Maybe it’s an indication that we do too much health care in normal times if people aren’t coming forward, that’s to be seen. So that’s the health, that’s on health, but this Health and Social Care levy, how much of that money is actually going to go into social care?

Ben Zaranko

Of the twelve billion or so net that is raised by the Health and Social Care levy each year, around 85% of that, to begin with is going to go to the NHS, to deal with this backlog problem. And the remaining 15%, so you know roughly 1.8 billion per year, will go to adult social care. Some of that is to try and improve work force training and provide a mental health support for staff. Some of that is to increase fees that will be paid to the social care providers, some of this to implement the new social care funding reform, and the government has a long shopping list of other things it would like to do as well. Urm so there’s 5.4 billion pounds over the next three years for adult social care in England, that’s intended to achieve a long list of things, it’s probably going to struggle to do all of them, but it is you know a substantial increase in social care funding that’s been announced.

Paul Johnson

It’s sounds bit, that as you say, given the things it’s supposed to be doing, and in particular Prime Minister’s announcement about the change in the way that we pay social care, such that no one has to pay beyond £87,000 I mean there must be a good chance it’s not going to be enough to certainly transform people’s experience of social care?

Ben Zaranko

I think that’s fair, yes, I mean it’s always possible that there will be more funding coming down the line, certainly the first time that social care was topped up and over time the plan is for more of this – as the NHS deals with the backlog, more money of that twelve billion or so a year can be shuffled into social care. So, you know in the medium term perhaps we will see more transformation, in the near term… it’s not going to be enough to dramatically increase the fees paid to providers, implement the new cap, a more generous means test, increase the pay that we provide to social care workers, to say match their NHS counter parts, and increase investments in housing adaptations, and you know, you can go on and on and on. There’s no way you can do all of that, but you can certainly make tangible improvements and some people may well see their experience improves, councils may find that they’re not struggling quite so much to provide the care which they’re obliged to provide. You know there are cautious grounds for optimism, but no, this isn’t going to be enough to fix everything.

Paul Johnson

Well maybe not enough to fix everything, but this additional money for heath and social care is genuinely really, you know between them really quite substantial over the next couple of years. And perhaps not surprising that government would focus on those given we, given we’ve just been through this pandemic and the scale of the backlogs created and the pressure that social care has been under. But of course, this isn’t by any means the only bit of the public sector which has been under pressure and which faces increasing pressures over the next two or three years. We’ve also seen the education sector significantly effected, schools were shut for a period, particularly during the first wave of the pandemic back in 2020, there was a lot of teaching from home a year or so ago, there’s been lots of issues with childcare and universities as well. So, I’m going to move on now to Christine to talk a little about where we are with regard to education. And let’s start of Christine with schools, I mean looking at it particularly from a financial point of view, what sort of position are schools in as we go into 2022.

Christine Farquharson

Well I think the really good news when we compare this January to last January is that schools at least are open this term – that’s important for everybody, for all children, but it’s particularly important for the most disadvantaged children who are the ones who on average lost out the most from remote learning. But it’s kind of tempting to say, “oh, schools are open then it’s all fine.” Actually, I think we’re in that situation that parallels the health care system in some ways, where the most recent official numbers from the DfE come from early December before omicron really took off, but more unofficial surveys say in the first week of term this year, a third of schools are dealing with COVID related staff absences over 10%. So, it’s definitely not the case that kids are going to school as normal and getting their education as normal. We’re probably storing up some disruption and storing up some problems for the future as well.

Paul Johnson

And what do we know about the scale of those future problems? We obviously have a lot of children away from school getting you know, varying amounts of input during the first period of shut down, second period of shut down, there seemed to be more consistency of input in terms of online teaching, but still not everyone got the same. What do we know about the levels and inequalities in learning loss from all of that?

Christine Farquharson

So, we’re starting to get a sense of where learning loss is, I think it’s important to reflect on and remember just how huge this period of disruption has been during the pandemic. So over the last two years, under the very best case scenario, if you’re the luckiest kid, you know you’re prioritised for early return, you never had to self-isolated either because you caught COVID or your class mates caught COVID, there is no local disruption that meant your school closed for longer than anyone else, under that best case scenario, kids in England lost out on sixteen weeks of in person schooling, and it was slightly higher in some of the devolved nations. That’s around a fifth of their total learning time over the 2019/20 and 2020/21 school years. So, these are really big periods of disruption that we’re talking about and that’s not even counting the Autumn 2020 term where we had lots of pupil’s kind of off on an ad-hoc basis. So, given the scale of the disruption, it’s probably not surprising that we’re starting to see that feed into really pretty substantial amounts of lost learning. Estimates suggests that by March 2021, so the end of the second period of school closures, primary school pupils were around two months behind where they were expected to be in their reading, they were almost four months behind in their math. That’s bigger for the most disadvantaged pupils, so this is not just about pupils on average losing out on a huge amount of learning, this is also about widening those inequalities and learning that we’ve been struggling with for years or probably decades before going into the pandemic.

There is a silver lining here which is that when kids went back to school after the first round of school closures, those gaps did start to close, and that learning loss did start to undo a little bit. And that’s really due to the efforts of school and teachers and parents and the pupils themselves. But the risk is that the more disruption we have, and the less time we spend tyring to catch up on that lost learning, the worse these problems are going to be, the more entrenched they’re going to become and for the older pupils who are leaving school that horizon we have for catching up on the lost learning is looking smaller and smaller.

Paul Johnson

And it’s always struck me that, I mean there are two issues here, one is that, on average pupils will learn a bit less, but the real social problem I suspect will be that that increased gap between the less well-off and the better off, I mean the social class gap is almost certainly increased reasonably substantially. But how much is government actually doing about this, I mean what sort of additional resources are schools getting in order to help with catch up?

Christine Farquharson

So, the governments put money into catch up, it’s about five billion pounds as of the last spending review. And a lot of those eggs are going into the National Tutoring Programme basket. Now, the scale of the catch up finding that we have on offer is not really in the same ballpark as the scale of what some industries have estimated. So, people, others have estimated the amount that’s needed to address this lost learning problem at closer to sort of thirteen or fifteen billion pounds. Nevertheless, this is a reasonable amount of money, and if it’s deployed well it can do a lot of good. The challenge we’re going to have is the government, from the top, from Whitehall, is trying to allocate this money through a programme that really hasn’t existed before last year in ways that are going to support the very different and very nuanced needs of pupils to try and catch up on what they’ve missed out on. And that’s not just you know, “have you learnt to read this word, have you learnt to solve this math problem,” that’s also, “where’s your mental health at? What about your social skills?” Have you built the kind of coping strategies and life skills and all of those other things that come along with being in school and being in person in school, and actually those are some of the things that, in terms of people’s long terms resilience and in terms of their ability to catch up in the classroom, those are some of the foundational skills that underpin that. Getting the strategy right, and getting the mix of support right for different kinds of pupils who’ve experienced different kind of difficulties over the last two years, is going to be really tricky to do from the middle of London.

Paul Johnson

And that that implies to me you think there should be more devolution of the money or the responsibility for allocating and spending the money to academy chains, to local authorities to school themselves?

Christine Farquharson

I think one of the really important things to get right in this phase of coming out of the pandemic, is re-building the relationships between schools, local education policy makers and the government – the department of education. In a lot of ways, those relationships have really been corroded during the pandemic with very little notice given for policy changes, with a lot of lack of consultation, with a lot of lack of bringing schools and head teachers and teaches, parents and families along with the policy. And so getting the relationship right so that schools have the responsibility and the agency that they need to make the best decisions for their pupils, but at the same time, that we’re making sure that money is being spent in way that have an evidence base behind them, getting balance right relies on everybody coming into that debate with good faith, and that means that the relationship between the central government and the people on the ground needs to be improved as a priority.

Paul Johnson

Yeah, and that’s something one hears an awful lot when talking to professionals in the education system, far too often this turns out to be a … a relationship which is not based on mutual trust and respect, shall we say, and that gets in the way of a lot of good policy. Finally, Christine, we could spend ages on every aspect of education but perhaps a word on the pre-school side of things, that’s actually something that’s, from what I’ve seen, has got remarkably little coverage in the media with respect to what the impact of COVID has been, but actually it’s been quite substantial, hasn’t it, for early years provision?

Christine Farquharson

Yeah, I think that’s exactly right, and I think it is puzzling in some ways that we spend so much talking and thinking about schools, a fair amount of time talking and thinking about university and then we have some of these other parts of the education system that really… seem to fly under the radar. In terms of the pre-school sector, I think there’s a couple of really big challenges here. The first is what providers are going to do. So, they had a fair bit of financial support through the first lockdown, the first set of enforced early years closures, but they’re coming into the current period with, on much more uncertain financial footing, and the funding formula, there were increases for that in the spending review, but they’re relatively small and a lot of the money has been quite targeted at certain kinds of people or certain kinds of providers. So, the financial sustainability of the sector as a whole is key.  

On the other hand, we have the lost learning argument for kids in early years settings. So, these, particularly three- and four-year-olds who weren’t able to take up their early education offer in person, are going to have missed out on some the opportunities that that gives them in terms of being socialised, in terms of developing the skills that they need to be school ready when they show up to education. That’s not something that we’ve really seen well assessed so far, mostly because those kids are still not quite old enough to have gotten into the school assessments system where we start to get that really good data. But those are potentially problems that are going to make it much more difficult for that teachers in reception and year one to catch those children up on learning and move them along in the academic side, as quickly as we’d like them too.

I think the final argument there is, ties into the cost of living that we were talking about at the beginning of the podcast. So, we’ve heard that families are under a lot of pressure, and we know that for families with pre-school aged children, we know that childcare’s a big part of that financial pressure. So… the government could well come under increasing pressure to rethink its strategy here. The current system is pretty fragmented, and it gives a fair bit of support of some families like working parents with three- and four-year-old children, it gives very little support to other families, for example parent with one-year olds get no free entitlement and really only have access to tax free childcare or to the benefit system if they’re, if they’re really quite low income. So, I think there’s, there’s going to be a lot of pressure to think about the childcare system as a whole, and whether it’s delivering what we want it to be delivering for all of the different types of families that are relying on it.

Paul Johnson

Well it’s interesting isn’t it, the way that the experience of the pandemic is forcing us or should be forcing us to think about the delivery of all sorts of public services, certainly as you say childcare, but also schools, I think universities have learnt a lot or are changing the way they behave as a result of this. We’ve certainly seen in the health and social care sector, the extent to which this has resulted in very different behaviours, I mean even from the sort of point of view of GPs probably doing things over phone and Zoom for a period well into the future. So, we’ve had a big change in our, I think assessment of what is happening in the public sector, but also as we think about, particularly going into 2022, big pressures throughout public sector provision. We’ve talking about health and social care and education, but clearly things like the, the justice systems and many others, local government also under pressure as we go into this year. And the difficulty here of course is coming back to this issue of cost of living, is if you’re going to spend more money on all of these things, particularly into the medium term in order to meet some of these pressures that’s going to require more taxes and that in the end results in even more of a squeeze on household incomes.

So, I’m going to round this off by going back round our panel of IFS experts and asking them that dreadful question which I always hate being asked, which is, “so what would you do?” what are the top policy options for the areas that we’ve been talking to you about? So, let’s go back to you Rob, first of all. So, in terms of dealing with this in particular this cost-of-living crisis as it’s called, this cost-of-living issue, what would you be advising Rishi Sunak at this point?

Robert Joyce

Well one thing that I think this provides a good opportunity to tidy up, really, is the way that benefits in particular are rated, not to say that that benefit recipients are the only group here of any concern, but there is a particular issue that arise from the fact that benefits go up in line with a lagged measure of inflation. So, during periods like now when inflation is rising, that means that benefits don’t keep up for some time. It can mean the opposite of course when inflations falling, which perhaps is problematic for slightly different reasons.

But this is causing an issue right now, the government could change this in a couple of ways, one it could try to be more forward looking in the sense that it could use near term forecasts of what inflation will actually be by say April when deciding how much benefits are going to go up by, rather than using this quite lagged measure. It already does that elsewhere, it does that for excise duties in particular. Or actually universal credit, for administrative reasons offers, it seems, the chance to be able to adjust benefits at short notice more easily. For reasons that have never been totally clear to me, this always seems to be very difficult to do with similar, traditional benefits, we’re told, but with universal credit, it is easier. So, the government could use that as an opportunity, at least for the universal credit system to simply wait a bit longer before confirming what April’s increase in benefits will be, using more up to date inflation measures. So, in some ways that’s quite an easy change, a sort of technocratic change that would help quite a lot for some of the most vulnerable people right now. And it also wouldn’t need to be a permanent change in their level of benefits either, one could claw back any extra money that’s given away this year as a result of that if one wanted to.

But I think there could be a slightly better permanent way of increasing benefits each year, that this a good opportunity to implement. As I say that’s not to say that there aren’t other, many other households that might find the coming squeeze difficult, but there it is more difficult to talk about what to do, because fundamentally what we’re talking about here, across the whole economy, a something like a thirteen billion pound increase in the cost of energy. So, to compensate for all of that would obviously be extremely expensive and fundamentally the country’s got worse off because something that’s very important that we consume has got more difficult to obtain. So, if you want to insulate households, even up to say the average household of that, it’s going to be, it’s going to be very expensive, and also you couldn’t do it. But I think there is bit of an easier win within the benefit system there.  

Paul Johnson

Great, thank you. And I think that’s really interesting what you’re saying about uprating benefits. I mean when inflation, as it has been for quite some time now is down at the one, two, three percent level, it perhaps doesn’t matter so much exactly how you go about uprating benefits and the fact that you uprate in April with September’s inflation figure is almost neither here not there. But now we’re in, you know at least hopefully a short period rather than an era of higher inflation, it really can make a big difference. I remember, because I’m just about old enough to remember this, discussions about this sort of thing in the 1970s when inflation was really high and actually people, particularly on benefits got a lot worse off through the year as a result of increasing prices. Helen what about taxes, what options, what’s the best option in open to the chancellor there?

Helen Miller

There’s a short term issue about what they’re going to do with the living standards crisis, and I think for my money, I think going along with what Rob was saying, I think I’d, you know, personally I’d be trying to find something more targeted to do through benefits systems, for example, rather than trying to do too much fiddling with the tax system because it’s just going to be particularly untargeted. My really big hope for tax, it’s always my hope, but it’s going to continue to be my hope is that they’ll think seriously about reform of taxes rather than just the level of tax. So, you can make arguments to whether taxes should be higher overall or lower overall and they’ll want to do some fiddling before the elections to have some tax rabbit to give away but take almost any area of our tax system and there’s just big problems in the structure of the tax that needs to be fixed. Just to reel off some examples, you know we have council tax system that’s thirty years out of date and it’s regressive, you know fixing the structure so that would help the levelling up; we tax capital incomes at much lower rates than earned income in large part because National Insurance contributions only apply to earned income, you know that’s a bit of a mess that we should be really fixing for a whole bunch of reasons. Environmental taxes are a mess, we have a net zero obligation that we need to be trying to achieve that you know taxes aren’t really pushing in the right direction, at least not as well as they could.  

So, I’d really like the government, almost in any of these areas, to pick them up and say, you know, not necessarily let’s fix them this year, but let’s have a plan about how we’re going to move towards fixing those taxes. I think the really big prize there is to say, regardless of how much revenue you want to raise overall, you can do it in a way that’s at least, less economically damaging and less unfair that some of the systems we have currently, so I think the prize here, is kind of a big one, whether you’re somebody who wants much higher taxes or much lower taxes. So yeah, almost, pick a bit of tax and try to fix it properly, rather than just fiddling around with rates, please.

Paul Johnson

Well, that will be nice, wouldn’t it, and actually particularly important given what we talked about in terms of the long run, the tax burden is rising quite a lot at the moment, and is likely to rise into the future as we deal with all of the upcoming priorities. And to be honest, ever more important for you to design those taxes well rather than as they are at the moment badly, so that’s quite a big, quite a big ask from Helen. Ben, what about, what about health and social care?

Ben Zaranko

Well, Paul, my biggest policy ask actually has nothing to do with health and social care, it’s for the government to mark all of England’s fixtures in the world cup with a bank holiday later in the year, But if we park that one for a few seconds; on health and social care, I think we take back, take a step backwards. I think largely the funding questions has been, at least the next couple of years, largely answered, and I think the question is now what do we do with that funding? And what I’d like to see is a much greater amount of focus and attention paid to evaluating, effectively what we spend that money on, and how well it works. I think there some signs, some very welcome signs that that’s embedded in the social care policy ambitions, so they’re doing what they call trail blazers where basically some areas are going to have to the charging reforms brought in a bit earlier, and they’re going to see what happens effectively. And then some signs that they’re going to push to have more national level social care data, so we can actually see, you know who’s using what types of care, what happens to them, what happens with different policy reforms, what happens with different price changes. That sort of thing, that’s very welcome, but I can see much more invested in that and that might mean, you know, not rolling things out in a national level all at once, which makes it much harder to see what impact it had, we’ve seen lots of that in the pandemic, so for instance, incentivising pharmacists to provide more vaccines by increasing the fee we pay then, why are we doing that nationwide? Why don’t we try it out in just a few bits of the country and see if they act different to other bits of the country. So actually, a bigger focus on evaluating what works and make sure we get the biggest bang for our buck would be my ask for health and social care.

Paul Johnson

That as well as bank holiday for the world cup. But yeah, and certainly right across public services government which really invests in working out what works, would be lovely. And we have far too little of it, as indeed I think the head of the national audit office was writing just earlier this week. Christine, finally, education, what would your number one priority be for this year?

Christine Farquharson

So, the government’s due to make about sixteen million education announcements in the next few months. We’ve got the school’s white paper; we have this really long delayed review of social educational needs and disability; we’re still owed an official response to the 2019 Augar review into post 19 education; another is - there’s going to be a lot of policy in this space. I think my big ask is, actually echoes what Ben said that was, we, we’ve got his money that’s predominantly going into the National Tutoring Programme, but into post-COVID catch up, and this is not a new question, all right, like how do we, how do we help children to make the academic progress we want them to make? How do we help particularly the most disadvantaged children to make the progress we’re expecting them to make? This is not something that’s just popped up in the last couple of years; it’s a question we’d really actually quite like to know the answer to in the longer term as well. And so, understanding how the National Tutoring Programme and this catch-up money is being used, and understanding what parts of that actually work and actually seem to deliver the most value for money, is not just going to pay dividends for targeting that pot, it’s going to be something we can really build on for years and years into the future. So, I think that’s, that’s got to be at the core of how were deploying these resources.

Since you asked me about pre-schools and since I’m always a bit sad that that gets, that that’s gets neglected, I think in that space would be really to understand and to think about who’s benefiting from the current system and particularly who’s not. And to think about what we can do to plug the gaps there. So, there’s those really young children, the one-year-olds and some of the two-year-olds, are getting substantially less support than some of the older children, exactly at the moment when their mothers and fathers, but mostly their mothers, are trying to make a decision about whether they go back to work after maternity, maternity leave. So, I don’t think any sort of policy that looks at the early years system of support as a whole can afford to ignore those groups anymore.

Paul Johnson

Well thank you, that’s quite an ambitious agenda laid out by you all there, Helen simply wants the, you know the, in a sense a reform of the entire tax system, and I think Ben and Christine would like to have a government that really spends money on things that work, and works out what does work alongside Christine’s desire for much more focus on the youngest children, which again all of the evidence tells us, is likely to be important both for them and for their parents.

Thank you all for what’s been a fantastic, if necessarily quick overview of four to the biggest issues that are going to be facing government and indeed will be part of the public debate for the next year. I’m sure that I will be talking to each of you individually in much more depth about each of these things over the coming weeks and months. But thank you everyone for listening to this, the first of our IFS Zooms In of 2022. I think that has whetted your appetite for some of the fantastic work that my colleagues have been doing, do look on our website and elsewhere for much more detail on all of those things. So, continue tuning in to the IFS Zooms In, keep well, and we’ll see you again soon.

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