Living standards will fall for many people in the UK as a result of Rishi Sunak’s budget, one of Britain’s top economic thinktanks has warned.
The Institute for Fiscal Studies said Sunak’s budget was a “once in a decade event” because he raised taxes by about £40bn and put the tax burden on course to exceed 36% of national income and settle at a similar level.
Sunak said his proposals were fit for a new age of optimism but the IFS said the effects of Brexit, which Sunak supported, and the pandemic would result in middle earners being worse off in 2022 as high inflation and tax rises more than outweigh weak wage growth.
“The worry for the government is for all the chancellor’s upbeat delivery, the voters may not get much feelgood factor. Over the next several years a combination of tax increases and high inflation will mean very slow growth in living standards,” Paul Johnson, the IFS’s director, said.
“High inflation, rising taxes and poor growth, still undermined more by Brexit than by the pandemic, will see real living standards barely rising and, for many, falling over the next year.”
Sunak was given £51bn of headroom by his budget forecaster, which revised estimates upward for economic growth and tax receipts. He boosted money available for government departments but also raised taxes to their highest relative level for 70 years.
The chancellor partly responded to criticism by reducing the impact of the scrapping of the £20-a-week universal credit uplift for poor people in work. He also introduced new fiscal targets to rein in spending over the next three years.
Another respected thinktank, the National Institute for Economic Policy & Research, said Sunak was moving too quickly to tighten fiscal policy, putting the recovery at risk. The cut to universal credit will still push many into poverty, NIESR added.
“A slower pace of consolidation would provide a more solid base for the recovery, would be fiscally responsible, and would allow the Bank of England to raise interest rates further away from the zero lower bound,” NIESR director Paul Mortimer-Lee said. There is an outside chance that the recovery could stall, depending on how Covid-19 and inflation, and therefore real incomes, evolve.”
Only 1.7 million people will benefit from the “taper cut” announced by Sunak for universal credit claimants in work out of almost 6 million people who lost £20 a week, NIESR said.
Arnab Bhattacharjee, NIESR research fellow, said: “This tax cut will not prevent tens of thousands of people from sliding into extreme poverty. Research by NIESR suggests that the end of the UC uplift will lead … to the doubling of destitution.”