The UK remains on track for a “disastrous decade” of stagnant incomes and high taxes, despite cuts to public services, the Resolution Foundation has said in its analysis of the budget on Wednesday.

Phillip Inman www.theguardian.com 

The thinktank, whose stated aim is to improve the standard of living for low- and middle-income families, said typical household disposable incomes were on course to be lower by the end of the forecast period in 2027-28 than they were before the pandemic, when inflation was taken into account.

While the chancellor, Jeremy Hunt, had announced an “impressively broad suite of policies” to encourage more people into work, he was unable to change the course of declining living standards, the foundation said.

“Britain’s economy remains stuck in a deep funk – with people supported into work but getting poorer, and paying more tax but seeing public services cut,” the report said.

The UK is forecast to have gone through “the biggest energy and inflation shock since the 1970s, while avoiding a recession, with unemployment peaking at just 4.4%”, it added.

The thinktank said taxes as a share of gross national product were on track to hit 37.7% by the end of the forecast, a 70-year high and a 4.7 percentage point increase since 2019-20, the equivalent to nearly an extra £4,200 for every UK household.

Workers also face paying more to the Treasury because personal tax thresholds have been frozen instead of rising with inflation, meaning wage growth pushes more people into higher rate bands – a phenomenon known as “fiscal drag”.

The Treasury’s independent forecaster, the Office for Budget Responsibility, said wages growth over the next five years would force 3.2 million people to pay tax for the first time, put 2.1 million into the higher-rate tax band, and add 350,000 additional-rate taxpayers.

The extra amount paid will rise steadily until 2027-28, by which point the government will be earning £29.3bn a year more in extra income tax.

The rise in taxes will still leave the chancellor with little room for manoeuvre at the end of the OBR’s five-year forecast period, mainly because a short-term lift in GDP growth will fade, leaving the overall tax rate lower.

“If even the slow growth of the past decade had continued, incomes would still be £1,800 higher than currently projected for 2027-28,” the Resolution Foundation said.

It described Hunt’s move to abolish the lifetime limit on tax-free pension savings as a very large boost to the wealthy – saving someone with a £2m pension pot almost £250,000 in tax.

The government argues the move, along with the increase in the tax-free annual savings limit from £40,000 to £60,000, are needed to prevent older NHS doctors from quitting work or cutting back their hours. The change is expected to discourage 15,000 higher earners from retiring early. But the foundation said it could have the opposite effect and allow the better-off to build pension pots so large they would still make an early exit.

Intense cost pressure on public services from stagnant budget allocations and rising inflation were “largely ignored” in the budget, the thinktank said, adding that Whitehall departments outside the protected areas of health, schools and defence faced 10% cuts in real terms to day-to-day spending per head by 2027-28.

This loss of spending power across most government departments will rise to 14% “if the newly announced aspiration for defence spending to rise to 2.5% of GDP is met over the next parliament”.

An increase in investment allowances to encourage businesses to buy IT and new equipment worth up to £28bn over three years represents the fifth major corporate tax change in just two years, “illustrating the lack of certainty that has frustrated businesses”, the report said.

The foundation calculated the policy would deliver a temporary 3% boost to investment, “when what Britain actually needs is a permanent 30% boost to catch up with our competitors in France, Germany and the US”.