Tax rises and inflation to squeeze UK living standards

Higher inflation and rising taxation to fund growing demand for healthcare and other public services will cause living standards in Britain to barely rise over the coming year, the Institute for Fiscal Studies think tank said on Thursday.

The IFS – whose views on economic policy are closely watched in Britain – said Wednesday’s budget statement from finance minister Rishi Sunak represented a big shift in favour of higher taxation and spending, compared with his immediate predecessors.

“What we have had is a chancellor responding to the ever-increasing demands of the healthcare system on the one hand, and the increasingly dire plight of the likes of the justice, social care and prison systems, starved of funding for a decade, on the other,” IFS director Paul Johnson said.

Britain’s budget forecasting agency, the Office for Budget Responsibility, said Sunak’s budget would take public spending to its highest since the 1970s and see the tax burden rise to its highest since the 1950s.

A rise in payroll taxes for workers and employers, starting in April, will bring 16 billion pounds ($22 billion) of annual revenue to fund more health spending. Increased tax on corporate profits from 2023 is forecast to raise a similar amount.

The OBR also forecast inflation will average 4 per cent next year, which would be its highest for a calendar year since 2011, due to higher energy prices and supply chain bottlenecks as the world economy emerges from the COVID-19 pandemic.

The IFS said the outlook for households’ disposable income was at odds with Sunak’s promise of “a new age of optimism”.

“Voters may not get much feel-good factor. 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,” the IFS’s Johnson said.

British living standards have stagnated since the 2008 financial crisis. The Resolution Foundation think tank estimates real wages in 2024 will be just 2.4 per cent higher than 2008, compared with a 36 per cent rise in the 16 years before the financial crisis.

Prime Minister Boris Johnson has hailed the prospect of higher wages, as some businesses have raised wages in response to labour shortages created by the pandemic and lower post-Brexit immigration.

But almost all economists see higher productivity as the only long-term guarantee of higher living standards, something which increased post-Brexit trade barriers and reduced immigration is likely to hamper.

“The country remains in need of an economic strategy that steers us through this period of huge economic change while addressing long standing challenges of low productivity and high inequality,” said Resolution Foundation director Torsten Bell.