Budget: Millions of Brits to face ‘real pain’ as rising cost of living and taxes will bite
Rising costs and tax increases will leave tens of millions of Brits worse off, economists said today. Their warning comes as experts are ploughing through yesterday’s Budget.
Rishi Sunak had claimed his Budget is a strategy to “usher in a new age of optimism”, but a leading economic think tank warned the public “may not get much feel-good factor”.
In fact, the Institute for Fiscal Studies (IFS) said today the poorest face “real pain” and middle earners will lose out.
IFS director Paul Johnson said living standards for many will fall with high inflation, rising taxes and poor growth being “undermined more by Brexit than by the pandemic”.
His warning came as the Resolution Foundation said the poorest fifth will be around £280 a year worse off despite the Chancellor softening the blow of his Universal Credit (UC) cut.
Researchers at the living standards think tank said three-quarters of households on the welfare scheme will be worse off despite the new tapering rules announced in the Budget.
Taxes will reach the highest level since the post-war recovery in 1950 and be £3,000 higher for the average UK household compared with when Boris Johnson became Prime Minister in 2019, they added.
That was coupled with a forecast that the weakest decade of pay growth since the 1930s, combined with rising inflation, means real wages are set to fall again next year.
Sunak insisted that it remained his “ambition” to “lower taxes for people” and insisted he had to take “corrective action” as a result of the coronavirus pandemic.
On Wednesday he outlined tax cuts for businesses, a rise to the “living wage” and a freeze to fuel duty as he sought to dampen the looming cost-of-living crisis.
IFS director Paul Johnson described the almost two decades of minimal growth in wages as “unprecedented” and issued a warning of hardship ahead of a 1.25% hike in national insurance.
Despite the “real and substantial” rises in public spending, he said finances in many departments will be “substantially less” in 2024/25 than back in 2010.
He highlighted spending per student in further education and sixth form colleges as one area where levels will be “well below”.
“This is not a set of priorities which looks consistent with long-term growth – or indeed levelling up,” Johnson said.
With the possibility of inflation hitting the highest level in three decades, he warned that “millions will be worse off in the short term”.
Johnson said there will be a “real, if temporary” hit of hundreds of pounds a year for benefits recipients as welfare payments will rise by around 3%, while inflation could be 5%.
“We are not at 1970s levels of inflation but we are now experiencing enough inflation that real pain will be felt as low-income households – most of whom have little in the way of financial assets – wait more than a year for their incomes to catch up,” he added.
For some in work that may never happen.
The around four million households on UC and out of work will suffer the £1,000 annual loss of the removal of the £20 weekly uplift and will not benefit from the changes to the taper rate, at which they lose benefits to wages, or the boost to the minimum wage.
That comes as the Office for Budget Responsibility warned the cost of living could hit the highest rate for 30 years, with inflation forecast to peak at close to 5% next year.
Sunak has sought to reassure Tory MPs and voters that he aims to reduce taxes by the next general election, but he has been unable to say when the fiscal conditions will allow this.
“As I said very clearly yesterday, my ambition is to lower taxes for people, that is what I would like to do as Chancellor,” he told Sky News.
“We had to take some corrective action as a result of the crisis and the response we took to it, but hopefully that now is done and, as we demonstrated yesterday, our priority is to make sure that work pays, that we reward people’s efforts and I’m delighted we could make a start on that yesterday.”
But the IFS said the Chancellor will have to develop “new and radical ways” to fulfil his ambition after swelling the state to its largest level in decades.
Johnson stressed that Sunak was doing this with “almost entirely a set of policy choices unrelated to the pandemic” by responding to Government departments having been “starved of funding for a decade” under austerity.
The IFS director said if the current forecasts are correct then the Chancellor could be in line for a pre-election giveaway of “perhaps £7 billion and still maintain some fiscal headroom”.
“But, given his newly stated fiscal targets, it’s not a huge or comfortable cushion,” he added.