Boiling point: British households could see Budget boost wiped out by inflationary pressure

November 1, 2021

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What's going on here?

Although the Budget announced by UK Chancellor Rishi Sunak was brimming with optimism, the combination of rising inflation, comparatively weaker pay growth and tax rises are set to wipe thousands from household wallets. 

What does this mean?

With optimistic economic forecasts estimating £35bn in additional annual revenue and the UK economy forecast to return to pre-Covid levels by 2022, Rishi Sunak promised a spending spree to delight households across the country. Sunak’s speech contained headline-grabbing pledges, including a minimum wage increase from £8.91 an hour to £9.50, a 50% business rates discount for retail, hospitality, and leisure and billions of pounds for “levelling up” local communities, transport links and education.

Behind the headlines, however, lies a nasty bite on the pockets of lower-to-middle income earners. According to the Resolution Foundation (an independent think tank), a freeze on the income tax threshold, a 1.25% increase in national insurance contributions, and the likelihood that business tax increases will be passed on to consumers could see the tax burden for every household increase by £3,000 a year by 2026. The think tank also forecasted a 2% drop in income for middle-income households and a 3.1% fall for the richest fifth of households by 2025.

What's the big picture effect?

For millions of low-paid Britons, the Autumn Budget provides a rosy outlook. According to The Resolution Foundation, a cut in the Universal Credit “taper” rate by 8% will leave 1.2m universal credit households £900 a year better off. Furthermore, policies within the budget will provide almost £500 extra to households on average.

However, the apparent monetary benefit from this budget is likely to be wiped out by a combination of higher taxes, rising inflation owing to higher costs from supply and labour shortages, and stagnant wages.

A report compiled before 24 September 2021 by the Office for Budget Responsibility (OBR), the independent government forecaster, expects inflation to average 4% in 2022. Since that report, the OBR has warned that inflation could hit almost 5%, the highest rate for thirty years. Inflation, a general increase in prices and a fall in the purchasing value of money, pushes up the cost of living. This cuts into wage increases, resulting in less disposable income for UK households. Analysis by the Institute for Fiscal Studies (IFS) supports this view. Although middle earners on around £25,000 will have pre-tax pay that matches price rises, extra income and national insurance contributions will set earners back by £180 every year. Furthermore, the trend of stagnant wages post-2008 provides a bleak forecast for future wage growth. The Resolution Foundation notes that by May 2024, real wages will have grown by just 2.4% since 2008.

Perhaps the “economy of higher wages, higher skills, and rising productivity”  Sunak hopes for will put an end to stagnant wages and help Britons afford to live comfortably. Such an aim is fitting for any Government. But with consensus amongst business leaders and economists that not enough is being done to mitigate supply shortages that are driving up costs, this aim may not be realised before the next election.

Report written by Jude Folorunso

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