Living standards in the UK may decline as higher inflation outstrips wage growth in the coming years, according to the fiscal watchdog, despite Budget measures intended to help with the cost of living.
Rishi Sunak, chancellor, announced a £2.2bn increase in universal credit, a 6.6 per cent rise to the minimum wage, a rise in public sector pay and a £1.5bn freeze to the fuel duty escalator on Wednesday.
The independent Office for Budget Responsibility have forecast nominal pay to increase by an average of around 3 per cent over the next five years, but added that inflation will consume most of this, leaving pay just 3.9 per cent higher than current levels in real terms by 2026.
Paul Johnson, director of the Institute for Fiscal Studies, said that this implied “stagnant” incomes. He added that previously announced rises in tax will mean “large swaths of the population face a squeeze on living standards over the coming year”.
“Rises in National Insurance contributions and . . . income tax in April will come on top of rising inflation, taking a significant swipe at people’s spending power.”
The OBR’s calculations were based on forecasts compiled prior to September 24, since when it notes there have been “energy price rises, increased evidence of supply bottlenecks, and shortages in key occupations”.
The watchdog warned that inflation may “rise even higher and turn out to be more persistent” than the 4.4 per cent peak in these forecasts.
The OBR published two scenarios for higher inflation. In one of these, they expect real incomes to fall until the next general election expected in 2024.
This pessimism comes despite optimistic recent data about the rebound from the early pandemic. The Low Pay Commission, an arms-length public body, recommended the rise in the minimum wage to £9.50 per hour, confirmed in the Budget, noting the UK’s current tight labour market conditions.
The LPC reported that average weekly earnings grew at an annual rate of over 8 per cent in the summer, noting that the number of vacancies in the UK has risen to 1.2m, a record high, as redundancies declined. In some sectors hit by labour shortages, notably transport and construction, it reported that advertised pay had risen by more than 8 per cent since the start of 2021.
Support for household incomes will also come from changes to universal credit, a benefit paid to support the unemployed and people in lower paid work. Claimants have their payments cut back for every pound they earn above an income threshold.
The Treasury said it intended to both raise the thresholds and cut the rate at which payments are reduced from 63 pence in the pound to 55 pence. The IFS estimated that a full-time worker on the minimum wage would gain around £250 in disposable income from the rise in their hourly pay, and around £1,000 from the changes to UC.
But the uplift, at a cost of £2.2bn, is much smaller than the £6bn a year reduction made in October, when the Treasury ended a temporary £20 a week boost to help households during the pandemic. The benefit of the changes will bypass the poorest, such as the unemployed and those on the lowest pay, if their income is already below the threshold.
Frances O’Grady, general secretary of the Trade Unions Congress, said: “This change does not make up for the £1,000 per year cut to universal credit, and does not help those on universal credit who cannot work.”
The Budget announcement of an end to public sector pay restraint will allow the public sector’s pay-setting bodies to start planning for pay rises, but the chancellor gave no further detail. Christina McAnea, general secretary of Unison, said: “With no certainty pay will rise above inflation, services will go on shedding experienced staff.”
The government’s decision to freeze fuel duty for the 12th year in succession was welcomed by campaigners such as Robert Halfon, the MP for Harlow, who said the freeze “cut the cost of living for workers up and down the country”.
The Budget, however, contains a rise in another unpopular tax. The OBR estimated that council tax will be £1.3bn higher by 2025-26, mostly because of a new rise intended to pay for social care.
FT economics editor Chris Giles’ 2-minute Budget summary
UK chancellor Rishi Sunak was able to craft his third Budget, and second of 2021, in the knowledge that he was sitting on hugely improved public finance forecasts. These came from the large tax rises he has imposed earlier in the year and a better economic outlook. He chose to bank some of the windfall and use the rest to spend more on public services, shielding them from much higher inflation. Sunak made it clear that if his luck holds, he would look at cutting taxes in the run-up to the next general election, which is due to be held in 2024.
A windfall in the public finances by 2024-25
Improved outlook increases government receipts by £46.3bn
Tax rises will bring in £25.2bn
Public spending increases and some tax cuts will cost £43.3bn
Leaving £28.1bn for reduced borrowing
Key economic figures
Persistent hit to the economy from coronavirus
Public borrowing in 2021-22
Leeway in Sunak’s current budget balance rule for 2024-25
Sunak’s ambition is to reduce the size of the state
But the chancellor’s tax rises far outweigh his tax cuts
Tax revenues set to reach 36 per cent of national income in 2024-25
This compares to pre-pandemic tax burden of 32.9 per cent
Share of public spending as proportion of GDP set to rise by 2.5 percentage points over course of this parliament
Inflation and the cost of living
Inflation forecast to peak next spring
Disposable incomes will take two more year to recover from the pandemic
Increase in universal credit to offset a £6bn cut
Business rates increase for 2022 cancelled
50% discount for retail and hospitality businesses in 2022-23
Announces end of R&D credits for UK companies investing abroad
Big increase in government funding for R&D, but money will flow slower
Real annual increase in day-to-day departmental spending
Amount of total spending gobbled up by health by 2024-25
Public sector pay rises no longer frozen
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