Incomes squeezed by record tax burden

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The Independent Online

The tax burden on households has risen to its highest since modern records began while growth in incomes has slowed sharply, according to official figures yesterday that will put a chill through retailers' hearts.

Taxes on incomes now take out almost a quarter - 23.6 per cent - of wages and salaries, according to the detailed national accounts for the third quarter of the year.

This pips the previous peak of 23.5 per cent reached earlier this year and in 2001 and is the highest since the measure was calculated in 1987. It hit a low point of 18.7 per cent just after Labour took office in 1997.

The national accounts also showed growth in households' disposable income after taking inflation, tax and mortgages into account had slowed to a two-year low. The figures took the shine off an upward revision to the headline annual growth rate to 2.9 per cent, its highest for two years and at the top of the Treasury's forecasts.

It puts the economy on a sounder footing to hit the Government's ambitious 3 per cent growth target for next year. The pound rose on fresh speculation of the need for another rise in interest rates. Analysts said the squeeze on households' finances was further evidence consumers would tighten their belts next year following signs of a bumper Christmas spending spree.

House disposable income grew just 0.2 per cent between the second and third quarters of the year to leave annual growth at 1.3 per cent, the slowest since the winter of 2004.

The amount of their total available resources households put aside for a rainy day also fell, implying consumers had dipped into savings to fund shopping.

"Households had to resort to running down their savings even to fund modest expenditure growth in the third quarter, which serves to highlight concerns over the sustainability of consumer demand," said Ross Walker, UK economist at Royal Bank of Scotland.

Rises in utility bills and petrol costs have eaten into households' spare income. Yesterday the AA Motoring Trust said the impact of fuel price rises had cost drivers £50 over the year.

Howard Archer, chief UK economist at Global Insight, said: "There are significant headwinds facing the consumer - higher interest rates, an increasing tax burden, rising debt levels and serious pensions concerns."

Research by Asda, the supermarket group, showed that, after paying housing costs, rates, transport and food, the average family had just £150 a month to spend.

"That's an incredibly tight budget," said John Longworth, an executive director at the company. "So if you can buy something £50 cheaper that makes a huge difference."

The Conservatives seized on the figures, saying that the issue for voters was how the Government had "taxed so much but achieved so little".

Shadow Chancellor George Osborne said: "The news that Gordon Brown is taxing so heavily is sadly no surprise to the millions of people who are hit every day by his ever-rising tax burden."

But the Treasury said the tax burden figure did not include income from a range of sources such as savings, shares, and asset disposals.

"The fact is that, as a result of all tax and benefit reforms introduced since 1997, all households will be on average £1,000 a year better off in real terms from April 2007," a spokesman said.

"In addition, the UK's tax-GDP ratio in every year since 1997 and going forward throughout the forecast period remains below peaks reached in the mid 1980s."

The Office for National Statistics said overall quarterly GDP growth was unchanged at 0.7 per cent for the fourth quarter in a row. The breakdown of the third quarter showed that robust business investment and higher government spending had offset a slowdown in consumer spending.