Labour Taxes Risk Extending UK Wage Stagnation, Analysis Shows

(Bloomberg) -- The looming increase in UK payroll taxes will lead to another stagnation in living standards, the Resolution Foundation said, illustrating how lower-earning workers could pay a significant cost for Labour’s first budget.

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Real weekly wages are projected to be just £13 ($17) higher by 2028 compared with two decades ago due to a combination of higher inflation and pay stagnating in the middle of the current parliamentary term, the left-leaning research institution said on Thursday. The analysis of Chancellor of the Exchequer Rachel Reeves’ spending plans, which included raising an additional £26 billion from the employers’ share of the National Insurance levy, echoed the findings a day earlier from the official Office for Budget Responsibility and others.

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The measure comprised most of the £40 billion package of tax hikes Reeves is relying on to close structural budget gaps, increase future investment and bolster strained public services. While the chancellor had promised to protect “working people” from tax increases, the Resolution Foundation said that employers would likely pass on much of the increase to workers by withholding pay raises and raising prices for goods and services.

“With Britain finally turning the page on its longstanding failure to invest thanks to a £100 billion boost to public capital spending, the hope is that this short-term pain will eventually turn into a long-term living standards gain,” said Mike Brewer, interim chief executive of the Resolution Foundation. “But if it doesn’t, future Budgets won’t be any easier to deliver, especially if further tax rises are needed.”

At the same time, the increase in borrowing would also weigh on workers, the think tank said, by supporting inflationary pressures and delaying expected interest-rate cuts by the Bank of England. And despite the increase in spending, the budget would still result in more than £10 billion of spending cuts for unprotected government departments, squeezing workers in related industries.

Prolonging a stagnation in real wages that stretches back to the financial crisis is fraught with political danger for Prime Minister Keir Starmer. The Labour leader was elected in July on a promise to revive the economy and improve struggling public services after 14 years of Tory rule, a period that included the country’s exit from the European Union, the Pandemic and an energy-price shock driven by Russia’s invasion of Ukraine.

The Resolution Foundation said that real household disposable incomes per person are set to grow by an average of just 0.5% a year over the next five years. Although that would be slightly stronger than the increase in living standards during the last parliamentary term, it would be the weakest ever under a Labour government.

The think tank also warned that there will also be further pain for unprotected departments that have faced the brunt of funding cuts since the financial crisis. Whitehall budgets spanning from transport to the Home Office were often targeted for cuts under the previous Conservative government, as the health and education budgets were spared much of the pain.

Increasing real day-to-day spending on public services by an annual 1.3% after 2025-26 will set back funding in areas such as prisons and local government to levels seen a decade ago. That implies £10.8 billion of per-person cuts to these budgets.

The findings may ignite criticism that Reeves will usher in another period of austerity for departments that are not protected. She will hope the economic outlook improves before she delivers a multi-year spending review next spring, allowing her to ease the pressure on government departments.

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