Middle-class England set for shock as taxes rise, wages stagnate
BRITAIN’S middle-income households will be hit the hardest by an unprecedented collapse in living standards, stagnating wages and tax increases, leading researchers said, in the wake of the fiscal plan that Chancellor Jeremy Hunt announced this week.
The typical UK household will take “a permanent 3.7 per cent income hit” following an increase in personal taxes, the Resolution Foundation warned. The Institute for Fiscal Studies (IFS) said the cost of living squeeze will be felt most by those on median earnings.
“They won’t benefit from the targeted support to those on means-tested benefits,” IFS director Paul Johnson said. “Their wages are falling, and their taxes are rising. Middle England is set for a shock.”
Johnson said the most striking figure in the Office for Budget Responsibility forecasts is its prediction that real disposable incomes are set to fall by 7 per cent over the next two years, more than at any point since records began more than 60 years ago.
It would return living standards to where they were a decade ago. On some measures, the IFS said, households are set to be 30 per cent worse off than might have been expected had pre-financial crisis trends continued through to the mid 2020s.
In a budget in all but name, Hunt unveiled £55 billion (S$89.8 million) of tax rises and spending cuts in an effort to fill a hole in the public finances caused by a permanently smaller economy and rocketing debt-servicing costs.
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About £30 billion will come through spending cuts and £25 from tax rises, though the most spending painful spending cuts are not due to take effect until 2025 – after the next general election.
The UK tax burden is now set to rise to its highest level since World War II, with much of the increase coming through “stealth” threshold freezes, which will drag hundreds of thousands more people into higher rates of tax.
Defending his measures on Friday morning, Hunt said he had no option but to spread the burden.
“It’s not possible to raise £25 billion of taxes just focusing on a very small group of very rich people,” he told BBC Radio 4’s Today programme. ‘I will hope to bring down taxes when we can manage to do it.’
However, the IFS said that an ageing population and pressure to boost funding for public services meant that “higher taxes look to be here to stay”.
Resolution said the tax-heavy consolidation “adds to pressure on the ‘squeezed middle’ as well as the top”.
A typical household faces a permanent 3.7 per cent income hit from these measures – the same as the top fifth of households – and bigger than the 3 per cent hit that the top 20th will face, Resolution said.
Higher rates of personal tax mean the annual tax bill for a typical household will rise by £1,700, or about 3 per cent of their income. The richest 10th of households pay around £4,300 more tax, also 3 per cent of income.
Resolution said Hunt’s plan to cut government spending by £36 billion after next election is “likely to be undeliverable” because of the unpopularity of the reductions it would require.
That part of Hunt’s programme would involve increasing day-to-day government sending by just 1 per cent in real terms from 2025 to 2028. That would take real spending per head of population back to 2014-15 levels – similar to what the Treasury spent at the height of a deeply unpopular austerity programme when George Osborne was chancellor.
That would require years of holding down public-sector wages below those in the private sector. The gap between private and public sector pay is already wider than it has been in over a decade. The latest earnings figures showed private-sector pay growing three times as fast.
“Significant spending cuts were only pencilled in for after the next election, and are unlikely to be delivered on the scale envisaged,” said Torsten Bell, chief executive of Resolution. BLOOMBERG
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