Rishi Sunak’s decision to raise taxes on workers amid high levels of inflation will squeeze living standards next year, causing “real pain” for low-income households, the Institute for Fiscal Studies has warned.
Issuing its verdict after the chancellor’s budget on Wednesday, the UK’s leading tax and spending thinktank said a middle earner was likely to be worse off next year as high rates of inflation and tax rises negate weak growth in wages.
It said that while Sunak was promising a new age of optimism, voters might not get much feelgood factor after the chancellor announced £40bn of tax increases this year – the largest increase since 1993.
Paul Johnson, the director of the IFS, said the outlook for living standards jarred with the chancellor’s upbeat tone. “Over the next several years a combination of tax increases and high inflation will mean very slow growth in living standards,” he 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.”
The thinktank said the chancellor’s plans came after a tough decade for households, with weak levels of economic growth and austerity.
It said the gap between what could have been expected on the basis of trends seen in the years running up to the 2008 financial crisis and what was actually happening was staggering, estimating that average gross earnings could have been 40% higher had pre-crisis trends continued.
The warning contrasts with Boris Johnson’s ambition to build a high-skill, high-wage economy. Suggesting that average workers would struggle to raise their living standards through their earnings, the IFS said: “The primacy of asset accumulation, and the importance of asset holdings, over the possibility of getting better off through earnings, is being maintained well into a second decade.”