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Taxpayers to take £500 to £1,000 hit as UK faces worst two years on record for household incomes

taxpayers Britain's Chancellor of the Exchequer Jeremy Hunt holding his traditional Red ministerial box waves as he leaves 11 Downing Street for the House of Commons to deliver the Budget In London, Wednesday, March 15, 2023. (AP Photo/Kirsty Wigglesworth)
UK households will feel “continuing pain” over the coming year with taxpayers' incomes being squeezed despite falling inflation. (AP Photo/Kirsty Wigglesworth)

Jeremy Hunt’s budget will leave UK households suffering “continuing pain” over the next year as changes will cost most basic-rate taxpayers £500 next year and most higher-rate payers £1,000.

In its analysis of the chancellor’s announcements, the Institute for Fiscal Studies (IFS) said while inflation may be coming down, prices remain much higher than two years ago.

“What households are going to feel over the next year will be continuing pain,” the respected independent think-tank said. “Earnings haven’t caught up.”

The IFS also stressed that the country was caught in a “trap” of huge debt, large interest payments and sluggish growth which meant “there is no money left post-election for additional spending or tax cuts”.

IFS director Paul Johnson said the freeze of income tax and national insurance allowances and thresholds will cost most basic-rate taxpayers £500 next year and most higher-rate payers £1,000.

“The OBR (Office for Budget Responsibility) may be relatively optimistic about the medium term, but it still thinks these will be the worst two years on record for household incomes,” he said.

“Its projections suggest that real household disposable incomes will be no higher in 2027 than they were in 2019, and barely higher than in 2017 — a lost decade for living standards.”

Read more: Budget 2023: Hunt scraps life-time pension allowance as he says UK will avoid recession

Real household disposable income per person, a measure of real living standards, is expected to fall by a cumulative 5.7% over the two financial years 2022-23 and 2023-24, according to the OBR.

Johnson also said money “will have to be found from somewhere” to give pay rises to public sector workers.

“You can’t keep cutting the pay of teachers, nurses and civil servants, both in real terms and relative to the private sector, without consequences for recruitment, retention and service delivery,” he noted.

James Smith, research director at the Resolution Foundation, said some UK government departments could be facing “really big hits” to their budgets if defence spending is increased to 2.5% of GDP as indicated by the prime minister.

The IFS also said it is “highly uncertain” what impact Hunt’s extension of free childcare will have on the labour market.

In his budget analysis, Johnson said such a significant move would bring “risks” for the childcare market if it was not properly funded.

He added: “The impact this will have on labour supply is highly uncertain, though the OBR score it as the biggest policy contribution to increasing numbers in work.

“The main effect will be to reduce the cost of childcare for those working parents who would have paid for childcare anyway.”

Johnson said scrapping the pensions lifetime allowance was also unlikely to play a “big part” in increasing the numbers of people in work while being very expensive.

“Even on OBR’s, in my view optimistic, assumptions this will come in at £100,000 per job,” he said.

“The lack of any coherent strategy here remains deeply disappointing.”

The think tank also warned that the chancellor’s plan to scrap the Work Capability Assessment (WCA) for benefits could risk some people with disabilities on universal credit losing out financially.

Tom Waters, senior research economist at the IFS, said: “Around 1 million people may be required to work and around 600,000 could be in line for a roughly £350-per-month loss of income, though in the short run all of them will be protected by transition measures.

“Many of them are likely to apply for PIP (Personal Independent Payment support) to keep that current entitlement, but if their condition doesn’t create higher living costs, then many of them won’t be eligible.

“The government faces a core trade off.

“It can accept many low-income losers or they can widen the pip criteria and get more high income, less severely disabled within.

“It has the risk of runaway spending on one hand or having sick low-income people losing out on the other.”

In a separate event, the head of the OBR said Hunt engaged with the forecast-setting process more than previous chancellors.

It comes after former chancellor Kwasi Kwarteng and former prime minister Liz Truss faced criticism after failing to work with the OBR on an assessment of their mini-budget announcement that caused an economic fallout last autumn.

Richard Hughes, speaking at a post-budget briefing organised by the Resolution Foundation, said: “It was the case that we saw the chancellor on four occasions in the context of this budget.

“We usually see the chancellor sometimes once, sometimes twice in the course of a budget.

“He wanted to talk to us on more occasions; that’s very welcome from our side of things because I actually think that iteration between what policies are being developed and what impact you think they might have on the economy is a useful and sensible thing in a policy-making process.”

Read more: Budget 2023: Childcare, pensions, tax, benefits — the key takeaways from Hunt's statement

He said separating the forecast and the policy creation process meant there was a risk of a “disconnect between the two, a misunderstanding about what might be the economic impact of this policy I’m going to introduce”.

The fiscal watchdog chief rejected criticisms of some politicians on the right about the influence of the OBR’s forecasts, saying: “These discussions were in essence about understanding what could be the economic impact of different policies the government might introduce, but the idea that we are some arbitrator of the government’s policy choices or have a veto on them is just nonsense.”

Watch: Budget 2023: Money will have to be found from somewhere for public sector pay, says IFS

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