Budget 2021: IFS predicts ‘real pain’ for low income households

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imageThe biggest wage squeeze in British economic history will leave the average worker almost £13,000 a year worse off by the middle of the 2020s, Rishi Sunak has been warned.

The Institute for Fiscal Studies (IFS), the UK’s leading tax and spending thinktank, said an unprecedented two-decade hit to earnings would leave average household disposable income 42% lower than it would have been had wages grown at pre-2008 financial crisis rates.

The 2010s were the weakest decade for real wage growth since the Napoleonic wars, but the IFS said the stagnation was expected to continue.By 2026, it said average household earnings would be £30,800, compared with £43,700 if wages had risen at the same pace as in the two decades before the banking crisis.

Household earnings graphic Paul Johnson, the IFS director, said the real-terms damage to household incomes was unprecedented in modern history, with weaker economic growth and higher inflation to blame.

“The gap between what we might have expected on the basis of pre-financial crisis trends and what is actually happening is staggering,” he said.

In a highly critical reception for Sunak’s budget and three-year spending review, the Resolution Foundation said the average household would pay £3,000 more in taxes as a result of the budget.Combined with high inflation and weak earnings growth, this would lead to a “flat recovery in household living standards” as the pandemic recedes.

At the budget on Wednesday, the chancellor partly reversed cuts to universal credit benefits in response to mounting concerns over the squeeze on low-income workers this winter, and granted a £150bn rise in spending limits for Whitehall departments to draw a line under austerity.

Disruption linked to the pandemic and Covid has pushed up inflation to the second-highest level in a decade in recent months, with a further increase in the cost of living expected this winter amid soaring energy bills and the rising cost of a weekly shop.

Official forecasts from the Office for Budget Responsibility show high levels of inflation will weigh on households’ finances this year and next, before real incomes then rise by just 1.3% a year on average up until 2026.It comes after a decade of sluggish real wage growth across several advanced economies, held back by lacklustre economic productivity since the 2008 financial crisis.

Labour and the trade unions said Sunak had taken insufficient steps to get wages rising across the economy at a difficult moment for UK households.

Rachel Reeves, the shadow chancellor, said: “This is a budget hammering working people, while giving banks a tax cut.The Tories have no plan to tackle the cost-of-living crisis, no plan to shift the unfair taxes they’ve hit working people with and no plan for growth.”

Separate research from the New Economics Foundation showed the poorest fifth of households would still be £380 a year worse off despite the chancellor’s decision to partly reverse cuts to universal credit, compared with keeping the £20 a week uplift scrapped earlier this month.

Coming amid high levels of inflation, the £40bn of tax increases announced by Sunak for this year would cause “real pain” for low-income households, said the IFS.

In a critical verdict for the chancellor, it said voters may not get much feelgood factor despite the chancellor pledging a “new age of optimism” as the country emerges from the emergency phase of the coronavirus pandemic.

“Over the next several years a combination of tax increases and high inflation will mean very slow growth in living standards,” Johnson said.

“High inflation, rising taxes and poor growth, still undermined more by Brexit than by the pandemic, will see real living standards barely rising and, for many, falling over the next year.”

Sunak made clear to Tory MPs that he planned to take action before the next election to reduce the UK’s highest levels of taxation since the early 1950s.This followed heavy criticism from his right flank over the rising burden and elevated levels of state intervention in the economy.

The IFS said Sunak could perhaps find space for a pre-election tax giveaway of about £7bn.However, this would depend on the strength of the economy and no additional increases in health and social care funding than was currently planned.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk Carl Emmerson, deputy director at the IFS, said any tax cuts would probably pale in comparison with heavy increases this year.

“He [Sunak] still wouldn’t be a tax-cutting chancellor given the huge tax increases we’ve already had.It’d only offset what we’ve had,” he said.

A spokesperson for the Treasury said the chancellor’s decisions would boost the incomes of the poorest people in Britain, and that higher taxes would mostly impact middle- to higher-income households.

“This government’s decisions have been worth nearly £500 per year extra to households on average, and more than £1,000 for the poorest households – and that’s before factoring in wage growth, including the rise in the ‘national living wage’.”.

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