British households are on course to be worse off at the end of a parliamentary term for the first time in modern history, leading economists have warned, after Jeremy Hunt’s £20bn autumn statement tax cuts favoured the richest 20% of earners.
A day after the chancellor’s speech, the Resolution Foundation thinktank said sluggish economic growth, persistent inflation and higher taxes meant the average household would be £1,900 poorer by January 2025 than they were in December 2019.
Defending his plans for the economy during a round of interviews on Thursday morning, Hunt acknowledged tax levels were rising, but said: “I did make a start in bringing down the tax burden, we can’t do it all in one go.”
The chancellor said he had rejected “crowd pleasing” cuts to taxes such as inheritance tax in favour of taxes that would “make the biggest difference to our long-term prosperity”.
Rachel Reeves, the shadow chancellor, highlighted falling living standards. She told Sky News: “The truth is this will be the first parliament ever where real disposable incomes are going to be lower at the end of it than they were at the beginning. People can see that when they look at their bank statements.
“The tax increases that have already been announced take more money than the chancellor gave yesterday.”
Despite a 2p cut in national insurance, a combination of high inflation and frozen income tax thresholds are dragging millions of workers into paying more tax – taking taxes as a share of the economy to the highest level since the second world war.
However, the country’s leading economic thinktanks said Hunt’s plans were predicated on a renewed austerity drive for public services, with a real-terms cut in the spending power of government departments that would rise to almost £20bn a year by April 2027.
The Institute for Fiscal Studies said the chancellor had “almost one-for-one” paid for tax cuts by slashing spending on public services, after refusing to top up funding to protect against rising inflation.
Paul Johnson, the IFS director, said Hunt’s plans to were likely to inflict more “pain” than the austerity drive undertaken by George Osborne in the 2010s.
“George Osborne managed to get the size of the state back down after the financial crisis. That was painful. Doing it again will be more painful still,” he said. “Mr Osborne made his cuts after a decade of big spending increases. Mr Hunt, or his successor, will have no such luxury.”
The Resolution Foundation said the top fifth of households in Britain would gain most from Hunt’s tax cuts. It said they would benefit by £1,000 on average, five times the gains of the bottom 20%, who would be only £200 better off from measures that include a 2p cut in national insurance.
While earnings are growing faster than previously estimated by the Office for Budget Responsibility (OBR) – the Treasury’s independent economic forecaster – real average earnings adjusted for inflation are not forecast to return to their 2008 peak until 2028 – in what Resolution Foundation labelled “a totally unprecedented 20-year pay stagnation”.
In what is widely seen as the opening attempt by the chancellor to woo voters before an election next year, Hunt announced on Wednesday that he was able to lighten the tax burden after a steep fall in inflation and after the economy had turned a corner.
However, he left in place £90bn of tax rises over the life of the parliament that the Resolution Foundation said remained progressive, with the richest fifth of households expected to lose £1,100 on average, while the poorest 20% wold gain an average of £700.
Torsten Bell, the thinktank’s chief executive, said that “despite the tax-cutting rhetoric”, taxes were on course to rise by 4.5% of the UK’s gross domestic product (GDP) between 2019-20 and 2028-29, equivalent to £4,300 a household.
The Resolution Foundation praised welfare benefit increases and a lifting of the cap on private rent subsidies after a freeze of several years that had been blamed for thousands of tenants being forced to leave their homes.
However, Bell added that the tax cuts and benefit rises were underpinned by an “implausible” squeeze on public services over the next five years that amounted to a 15% budget reduction in real terms for unprotected departments such as justice and transport.
Commenting on the fall in real household disposable incomes, Bell said it was a “disaster for households” after two decades of wage stagnation, adding: “This parliament is set to achieve a truly grim new record: the first in which household incomes will be lower at its end than its beginning.”
