Budget Claim Discount Rate
Headline fiscal numbers overstate real impact — always find the net after behavioural and compensating effects
Budget announcements lead with headline revenue numbers — the gross yield from a new tax or spending cut before any second-order effects. Paul Johnson demonstrated this with surgical precision on the 2024 employer NI rise: the headline table said £25bn raised, but the net fiscal gain to the Treasury was closer to £10bn. The gap is not sleight of hand — it is structural and transparent in the OBR's own numbers — but it is routinely ignored in political and media coverage.
The gap arises from three main channels. First, if businesses pass costs onto wages, those lower wages generate less income tax and employee NI revenue for the Treasury. Second, if profits are squeezed, corporation tax receipts fall. Third, the government must compensate its own public sector employers for the same NI increase — money that immediately flows back out. Each channel is a discount on the headline number.
This 'Budget Claim Discount Rate' framework gives a repeatable method for stress-testing any fiscal announcement: identify the headline number, map the compensating flows, and estimate the net. Applying even rough percentages transforms budget literacy from passive reception to active interrogation.
- The headline revenue number in a budget table is a gross figure — it assumes no behavioural response from those being taxed.
- Every tax measure creates compensating flows that reduce net Treasury gain: lower receipts on related taxes, government sector compensation, and behavioural avoidance.
- Public sector employer compensation converts a significant fraction of any payroll tax rise into a fiscal wash.
- The gap between headline and net is not dishonesty — it is visible in the OBR's own forecasting models — but political communication almost never surfaces it.
- Gross-to-net discounting applies equally to spending cuts: apparent savings in one line create costs in related lines.
- Record the headline numberNote the gross revenue or saving figure as it appears in the budget table. This is your starting point and typically the figure that receives all media attention.WarningDo not use the political speech figure — use the OBR or budget table number, which may already differ from what the Chancellor stated.
- Identify behavioural offset channelsFor a tax rise: what is the likely reduction in related tax bases? For employer NI — lower wages mean lower income tax and employee NI receipts. Lower profits mean lower corporation tax. Quantify each channel.Pro tipThe OBR models these offsets — look for the 'ready reckoner' adjustments in the fiscal annex, not just the headline costing line.
- Subtract public sector compensationAny tax that applies to government employers requires the government to compensate its own departments — an outflow that directly offsets the inflow. This is often the largest single discount on payroll taxes.Pro tipFor the 2024 NI rise, this alone accounted for roughly £5-6bn of the gross-to-net gap.
- Calculate the net fiscal positionNet = Headline − behavioural revenue offsets − public sector compensation − any directly associated spending increases. Express this as a percentage of the headline to get your 'discount rate' for this measure.Pro tipA discount rate above 50% (as in the 2024 employer NI case, ~60% discount) signals the political headline is highly misleading relative to the real fiscal impact.
- Apply the net figure to sustainability questionsAsk whether the net revenue change meaningfully changes the fiscal trajectory. A £10bn net gain on a £100bn deficit is material but not transformative — calibrate the political rhetoric accordingly.WarningAvoid conflating a net Treasury gain with a net social gain — distributional impacts on households may be large even when fiscal impact is modest.
The budget table showed £25bn gross revenue from raising employer NI. IFS analysis: lower wages reduce income tax and employee NI receipts (netting to ~£16bn), then public sector compensation reduces Treasury's net gain further to ~£10bn.
For 15 consecutive years, chancellors included modelled fuel duty inflation increases in their baseline, then announced a freeze as a 'cost', while the actual revenue flat-lined. The headline 'cost' of the freeze was never a real revenue loss — it was a reversal of a planned increase that no one ever intended to implement.
Paul Johnson applied this framework live during a Thursday IFS presentation in Budget week 2024, walking through the employer NI arithmetic. His point — that the £25bn headline became roughly £16bn after second-order labour market effects, and roughly £10bn after accounting for public sector compensation — crystallised a methodology the IFS uses routinely but which rarely reaches mainstream coverage. Barrett's parallel FT reporting on business reaction provided the real-world transmission mechanism that validates the modelling.