Britons are facing the sharpest drop in living standards on record as the government tightens its belt

Prime Minister Rishi Sunak (centre) and Finance Minister Jeremy Hunt (centre right) hold his first cabinet meeting on October 26, 2022 in London, England.

WPA Pool | Getty Images

LONDON — As the UK government announces a £55bn ($65.5bn) program of tax increases and austerity, the country is facing the sharpest drop in living standards since records began.

In addition to confirming that the country has entered a recession and GDP will shrink by 1.4% in 2023, the independent Office for Budget Responsibility (OBR) estimated on Thursday that households’ real disposable income – a measure of living standards – will drop to expected to fall by 4.3%. % in 2022-23.

This would be the largest one-year drop since the Office for National Statistics (ONS) began measuring in 1956-57, and will be followed the next year by the second largest drop of 2.8%.

The cumulative decline of 7.1% between 2021-22 and 2023-24 would bring RHDI down to its lowest point since 2013-14, wiping out eight years of growth. Average household income per capita is not expected to recover to 2018-2019 levels until 2027-2028.

Unemployment is also expected to rise by 505,000 from 3.5% to a peak of 4.9% in the third quarter of 2024.

The OBR said the short-term declines would have been worse without the substantial fiscal support the government provided this year in the form of the Energy Price Guarantee and successive tranches of cost-of-living payments to low-income households.

Nominal wage growth picked up in 2022 and is expected to remain high in 2023, but was not enough to prevent a significant fall in real wages, which has created historic pressures on household incomes. The OBR forecasts real wages to fall by 1.8% in 2022 and 2.2% in 2023, before recovering and growing at an average annual rate of 1.3% thereafter.

UK budget plan has large margin of error for OBR forecasts, says Liberal Democrat MP

In Thursday’s autumn statement, Chancellor of the Exchequer Jeremy Hunt announced £30bn in cuts and £25bn in tax increases as he lifted the government’s ceiling on household energy bills under the Energy Price Guarantee scheme by £500 per month. year increased.

The measures include an additional two-year freeze on income tax thresholds and a reduction in the top income tax rate to £125,140, ​​along with windfall increases on energy companies’ profits.

The Resolution Foundation — a think tank focused on improving the living standards of low- and middle-income people — said in a report Friday that Hunt’s measures had put further pressure on the “squeezed middle,” with personal tax increases announced at the next parliamentary session. period expected to see a permanent 3.7% drop in income for typical households.

“The OBR’s weaker forecast for wages means that real wages are not expected to return to 2008 levels until 2027. If wages had instead continued to grow at their pre-crisis pace during this unprecedented 19-year wage decline, they would be £292 a week – or £15,000 a year – higher,” the Resolution Foundation report said.

The foundation’s director of research, James Smith, said Hunt was essentially faced with the choice of deciding how Britain, as an energy importer during an energy price shock, would become poorer.

“He has decided that households will do so with higher utility bills, higher taxes and poorer public services than previously anticipated. Whether making the choices was difficult or not, the reality of life through the next few years will be,” Smith said.

Barclays economist on how to get the UK government debt on a downward trajectory

Hunt did announce targeted fiscal support for those on low incomes or means-tested benefits and pensioners, while pensions and benefits will rise in line with September’s annual inflation rate of 10.1%, a spending commitment of £11bn. These measures are expected to limit the depth of the recession.

“The continued fiscal support to households through 2023 supports our assessment that the recession is likely to be less shallow than currently projected by the Bank of England and the Office for Budget Responsibility,” said Raj Badiani, chief economist at S&P Global Market Intelligence. .

“Our main concern is that government tax calculations rely heavily on the higher windfall tax on oil and gas company profits, which is expected to raise £14bn by 2023. History suggests that windfall revenues often disappoint, suggesting on lingering risks of fiscal loopholes and unexpected increases in government borrowing.”

Many of the deepest cuts were heavily delayed beyond April 2025, which the Institute for Fiscal Studies says was “probably the right choice” given the potential economic and social costs of an “unnecessarily large upfront fiscal tightening” and the “profound uncertainty.” ingrained in the outlook.

“But postponing all difficult decisions until after the next general election casts doubt on the credibility of these plans,” said IFS Director Paul Johnson.

“In particular, the tight spending plans after 2025 may stretch credulity.”

Johnson said the chancellor hopes his clear commitment to fiscal responsibility and the independence of the Bank of England, together with the involvement of the OBR and his “less pugilistic approach to economic policy-making” will be enough to “restore Britain’s position” . torn international reputation.”

Leave a Reply

Your email address will not be published. Required fields are marked *