Britain is entering a “new era of higher taxation”, combined with strained public services and the longest stagnation in real wages for more than 200 years, two leading think-tanks said on Friday.
Publishing their analyses of Jeremy Hunt’s Autumn Statement, the Institute for Fiscal Studies and the Resolution Foundation said the chancellor was dealing with the reality of a country that had just become much poorer.
Both said the slide was the result of the energy shock, but also the government’s long-term failure to generate the economic growth needed to underpin rising living standards.
The measures set out by Hunt on Thursday included £25bn of tax rises and £30bn of spending cuts, intended to restore Britain’s fiscal credibility and help bring down soaring inflation.
The IFS said this constituted the bare minimum needed for Hunt to meet, “by a hair’s breadth”, new fiscal rules that were the loosest adopted by any chancellor since 2010.
In the short term, the IFS said new money for schools, hospitals and local authorities meant spending would not change much on paper. But it added that inflationary pressures could be stronger than official figures suggest, and public sector workers could still face real terms pay cuts or job losses next year.
Plans to cut spending after the next election “should be taken with a large pinch of salt”, the think-tank warned.
But Paul Johnson, IFS director, said that even if the fiscal outlook had improved by the next election, the tax burden was still likely to rise above 37 per cent of national income and settle at more than 4 percentage points — or £100bn — higher than it had been for most of the past 70 years.
High taxes and borrowing would not translate into generous public spending, however, because Britain would have to spend much more on debt service at higher interest rates, on health and on benefits.
“With defence spending cuts off the table, an ageing population and pressures everywhere else you look, my guess is that we are in a new era of higher taxation,” said Johnson.
“We are . . . reaping the costs of a long-term failure to grow the economy . . . The truth is, we just got a lot poorer.”
The scale of the problems facing the country as a whole was shown starkly in analysis published by the Resolution Foundation, which said that British workers were “living through a two-decade wage stagnation”.
The Office for Budget Responsibility, the independent fiscal watchdog, forecast on Thursday that average real wages would not return to 2008 levels until 2027.
Such a prolonged stagnation in UK real wages has not been felt since the 1820s, according to figures calculated by the Financial Times based on long-run estimates of UK economic statistics.
The Resolution Foundation found that if wages, adjusted for inflation, had grown at the pre-financial crisis rate of roughly 2 per cent a year since 2008, average real earnings would be £15,000 a year more in 2027 than the OBR now expects.
It added that Hunt’s “stealth” tax increases, freezing many tax thresholds and allowances across the system, would lower the typical income of households by 3.7 per cent. This would be spread relatively evenly across families on different incomes from the middle to the top of the income scale. The impact on poorer households would be mitigated by inflation-adjusted benefits and pensions.
Real disposable incomes are set to fall 7.1 per cent over the next two years, the biggest decline for six decades, according to OBR estimates.
The IFS said this fall in living standards would affect everyone, but risked hitting people on “middling sorts of incomes” hardest. This is because they face real terms wage cuts and higher taxes but will not receive the targeted support offered to those on means-tested benefits.
“Middle England is set for a shock,” said Johnson.