Budget reveals high tax, weak wage economy will hit middle income families, Resolution Foundation says

Highest taxes since 1950s will see households considerably worse off by 2026, think tank warns

Anna Isaac
Thursday 28 October 2021 15:20 BST
'National Insurance is a progressive way to raise money': Rishi Sunak

Higher taxes mean middle income families will be worse off by mid-decade, according to a new budget analysis by living standards think tank, the Resolution Foundation.

Tax will reach its highest level as a share of the economy since 1950 by 2026-27, the study shows. This is equal to a £3,000 increase per household since Boris Johnson took office as prime minister.

It comes as weak pay growth will cause real wages to fall next year, accounting for inflation. This is even as the UK experiences its worst decade for pay growth since the 1930s.

The UK’s stagnant living standards “remain the dominant feature of this era” the think tank said. In the 16 years leading up to 2008, pay packets grew by 36 per cent on average, compared to 2.4 per cent in the 16 years up to 2024.

The Budget revealed “not the high wage economy envisaged by the prime minister last month, or even the lower tax economy that Rishi Sunak said was his goal yesterday”, said Torsten Bell, chief executive of the Resolution Foundation. “Instead the chancellor has set out plans for a new high tax, big state economy.

“Higher taxes aren’t a surprise given the UK is combining fiscal conservatism with an ageing society and a slow-growing economy. But it is the end of low tax conservatism, with the tax take rising by £3,000 per household by the middle of this decade,” he added.

Even with changes made to universal credit by the chancellor on Wednesday, three-quarters of families on the benefit are set to lose more from the £20 cut than they gain from his new measures.

The shift, to allow households to keep 8p more per pound they earn on the benefit, would offer a big boost for some households who are able to work, but they will be “overshadowed” by the much larger £6bn cut made by Mr Sunak on 6 October.

There is also no clear-cut end to austerity yet, the think tank concluded. This is despite the chancellor pushing spending to its highest level – aside from during recessions – since the 1980s.

The Budget did stop departmental budgets from falling, but it only reverses one-third of the cuts introduced after 2010, for the so-called “unprotected departments” beyond health and education. This means that departments such as work and pensions, and transport, have per-person budgets which are still 40 and 32 per cent lower, respectively compared to 2009-10 levels.

“While tax revenues and NHS spending will be growing rapidly in this economy, growth in pay packets and family incomes looks far more anaemic – a huge challenge that the welcome rise in the national living wage and boost to universal credit eased, but did not overcome,” Mr Bell said.

He added that the challenges of climate crisis, Brexit and the pandemic were not adequately addressed by the chancellor on Wednesday. As a result, Britain “remains in need of an economic strategy that steers us through this period of huge economic change”.

This gap in the Budget also included an absence of clearer plans for addressing the transition to a low carbon economy in the coming decades.

The chancellor’s move to halve air passenger duty on domestic flights and to maintain the long running freeze on fuel duty provoked outcry ahead of the UN Cop26 climate conference in Glasgow. Aside from tax cuts on carbon emitting activities, there was also not enough spending dedicated to climate goals, economists warned.

“The Budget did not signal a laser-like focus on meeting net zero targets,” the Resolution Foundation said. The spending on climate adaptation policies was too low to be “commensurate with that required by the government’s own route to net zero plans”.

The economy’s better-than-expected performance had allowed the chancellor to present a Budget that increased spending but also left some buffer within his rules to have “underlying debt” falling by 2024-25. But the size of the present “windfall” from higher GDP growth within these rules, often termed headroom, was not large considering the range of uncertainty facing the UK economy.

The Resolution Foundation challenged the use of such rules, and instead proposed greater flexibility, allowing for greater spending in the face of weaker GDP growth.

It is “vitally important that rules enable fiscal policy to support the economy through more severe economic downturns”, the think tank said.

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