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The Office for Budget Responsibility’s verdict is in. It warns that living standards will fall at the fastest pace on record.
With inflation surging to the highest in decades, the fiscal watchdog says the unprecedented squeeze means real living standards won’t reach pre-pandemic levels for two years.
The public finances have emerged from the pandemic in better shape than expected. But Russia’s invasion of Ukraine will push inflation to a 40-year high of almost 9%, and living standards are set for a historic fall over the next 12 months.
Higher inflation will erode real incomes and consumption, dragging growth this year down to just 3.8%, from 6% forecast before.
The OBR explains:
With inflation outpacing growth in nominal earnings and net taxes due to rise in April, real livings standards are set to fall by 2.2% in 2022-23 – their largest financial year fall on record – and not recover their pre-pandemic level until 2024-25.
A 2.2% fall in real household disposable incomes per person would be the largest fall in a single financial year since ONS records began in 1956-57.
The UK labour force is now expected to be 400,000 smaller in five years time than expected before the pandemic.
Nearly half of this decline is due to a smaller population, due to lower net inward migration, the OBR says.
But 210,00 is due to people leaving the labour force : with more early retirements and a rise in long-term sickness, leading to a higher inactivity rate among those of working age.
The Office for Budget Responsibility says in its report that the latest evidence has not led it to change is assumption that Brexit will lead to a 15% drop in trade, with productivity ending up after 15 years 4% lower than it otherwise would have been. It says:
Our forecast continues to assume that leaving the EU will result in the UK’s total imports and exports being 15% lower than had the UK remained a member state. This fall in the trade intensity of UK output is likely to reduce the level of potential productivity, though the size of this effect is uncertain; we assume productivity is ultimately 4% lower after a 15-year period.
This chart shows that, while all economies saw trade drop during the pandemic, in other countries it has bounced back much more than it has in the UK.
The OBR also says none of the government’s free trade deals to date have been significant enough to have a “material impact” on its forecast. It says:
The government’s own estimate of the economic impact of the free-trade agreement with Australia, the first to be concluded with a country that does not have a similar arrangement with the EU, is that it would raise total UK exports by 0.4%, imports by 0.4% and the level of GDP by only 0.1% over 15 years.
School leaders say the chancellor’s spring statement failed to address the financial pressures facing schools and teachers.
“Schools are reporting huge increases in their energy bills and the government expects them to fund pay awards out of these stretched budgets too,” said Geoff Barton, the general secretary of the Association of School and College Leaders.
We are gravely concerned that [schools] are facing a fresh funding crisis. This is compounded by the inadequacy of the proposed pay award for many staff which comes after a pay freeze and is likely to worsen retention rates.
Dr Patrick Roach, the general secretary of the NASUWT teachers’ union, said latest research had shown that more than one in five teachers are “very worried” about their finances, with some using food banks and 12% taking a second job.
While the announcements about fuel duty and national insurance will offer some modest assistance, our members are still facing a deepening crisis in making ends meet and there was little in today’s statement that will offer them much comfort or reassurance.
There was similar dismay in the early years sector. Neil Leitch, the CEO of the Early Years Alliance, said:
Today’s spring statement was an opportunity for the government to address the early years funding crisis but, yet again, it has failed to do so.
Ultimately it is parents and providers who will pay the price.
Last year the government announced a bailout for Bulb Energy as it was going into administration. It received help, while other energy companies were allowed to go bust, because of its large, 1.6m customer base, and the £1.7bn bailout was described as a loan.
But the OBR report today says this bailout will cost the taxpayer more than £2bn. It says:
The government’s bailout of Bulb Energy incurs a £1.2bn cost in 2021-22 and a further £1bn in 2022-23, to cover the company’s operating losses. Given the volatility in global energy markets, there remains uncertainty around the final cost.
Ed Miliband, the shadow secretary of state for climate and net zero, claims this is a direct result of the government’s failure to regulate the energy market properly.
Economist Kallum Picking of Berenberg bank says we shouldn’t be fooled – the UK tax burden is going up.
In contrast to his claims that he is lowering the UK tax burden, UK Chancellor Rishi Sunak today unveiled a conservative fiscal plan that will raise the UK tax burden to its highest level since 1949 (see 2.47pm’s graph).
Based on his latest plans, which include some modest measures to buffer households against rising energy prices as well as tax cuts, which barely offset the sizeable tax windfall coming from forecast revision, the Office for Budget Responsibility (OBR) projects that tax revenues will increase as a percentage of GDP to 36.2% by 2025 from 33.0% in 2019.
The chancellor has also created headroom to ease aggressively when the next downturn comes, Pickering adds, by banking some of the tax windfall from improved OBR forecasts, and the change in student loan repayments.
That could also allow a ‘modest’ pre-election giveaway in two years’ time, Pickering adds:
If the UK returns to solid growth once the dual shock of Putin’s war and surging inflation (which is worsened by, but preceded the war) has faded, we would expect the chancellor to announce modest tax cuts just before the next general election scheduled for May 2024.
Almost 3 million more people are going to be brought into paying income because the income tax threshold has been frozen, the Office for Budget Responsibility says. And this number is higher than it would have been because of rising inflation. It explains:
The strong growth in higher- and additional-rate taxpayers between 2019-20 and 2021-22 is set to be compounded by the four-year freeze on income tax thresholds that starts in April 2022. This will further increase the number of new taxpayers and higher-rate taxpayers.
Upward revisions to our CPI inflation forecasts since we initially costed the threshold freeze in the March 2021 budget have increased our estimate of the number of new income taxpayers created by the measure from 1.3 to 2.8 million by 2025-26 and the number of new higher-rate taxpayers (including all income, not just that paid via PAYE) from 1.0 to 2.0 million over the same period.
That would represent 8.3% more income taxpayers than would otherwise have been the case, and 42% more higher-rate taxpayers (from 33.4 to 36.1 million and 4.8 to 6.8 million respectively).
This phenomenon – people being pulled into a tax band because of their pay going up faster than the threshold – is called fiscal drag.
The OBR also says that by 2024-25 tax receipts will be £68.2bn higher than its pre-pandemic forecast – and that £43.8bn of that is due to tax rises.
Highlighting these figures in a news release, Ed Davey, the Lib Dem leader, said:
This tax bombshell will send a shiver down the spine of families who are drowning in spiralling bills.
Rishi Sunak is trying to swindle the British public by burying the true cost of his disgraceful tax hikes. He has insulted millions of squeezed families across the country by thinking he can hide this in the small print. Rishi Sunak is following Boris Johnson’s lead by not being up front and honest with the country.
Low-income families and pensioners face a painful cost of living squeeze this year, after Rishi Sunak resisted calls to uprate benefits in line with the current surge in inflation.
Both Universal Credit payments and the state pension are rising by 3.1% in April, in line with last September’s CPI inflation figure.
The surge in inflation since, towards 8% later this year, meant the Treasury was urged to lift benefits by more than just 3.1%.
It would have been the best way of targeting help to low-income households, who are most vulnerable to the cost of living crisis, Resolution Foundation analysis showed.
Without it, benefits will fall by almost 5% in real terms in the coming financial year, the Office for Budget Responsibility says.
Dr Silvia Galandini, Oxfam Domestic Poverty Lead warns that more people risk falling into poverty:
“With the cost of living soaring, today’s announcements will do little to help millions of low-income families who were looking to the Chancellor for urgent support.
By only increasing benefits to 3.1% – half the rate of inflation – he has effectively cut benefits twice now in six months*, risking an additional 400,000 people being pulled into poverty.
[* – the first cut was ending the £20/week increase in universal credit last autumn].
Jamie Jenkins, director of policy and external affairs at Royal London, points out that state pensioners would be receiving a rise over 8%, if the government hasn’t dropped the triple-lock link to earnings last autumn when wages were rebounding after pandemic disruption.
“It’s not just workers that will see an additional income hit this year. Those receiving their state pension, the bedrock of a retirement income for many, will also be worse off as a result of suspension in the triple lock, the formula that sets the yearly state pension rise.
“From next month pensioners will receive an increase of 3.1% in their state pension, instead of the 8.3% they would have received if the earnings component hadn’t been stripped out, a blow for older people already spending a higher percentage of their income on food and fuel.
Economist Richard Ramsey flags that benefits next year should catch up, as inflation is likely to be high this September. But that’s no help over the next 12 months:
The OBR warns that this timelag will cut £12bn off the real value of benefits.
In the welfare system, lags in CPI uprating of benefits means they fall by almost 5% in real terms in 2022-23, reducing their real value by £12bn, and take up to 18 months to catch up fully with higher inflation.
And here is some more party political reaction to the spring statement.
From Kate Forbes, the SNP Scottish government’s finance minister
From Christine Jardine, the Lib Dem Treasury spokesperson
Families were looking to the Chancellor to offer them hope, instead he is adding to their pain by refusing to scrap his unfair tax rises.
People seeing the biggest plunge in living standards in fifty years will see through the chancellor’s spin.
Rishi Sunak has failed to introduce a windfall tax on the super profits of oil and gas producers, which could have raised billions to help people with their energy bills. And he has refused to bring in an emergency cut to VAT, as Liberal Democrats have called for, which would put £600 back into the pockets of the average family.
From Sammy Wilson, the DUP Treasury spokeperson
It would be churlish not to accept that the chancellor has sought to deal with many of the issues that face working families today. But I believe that given the windfall in taxes which he has experienced that there could have been more done to help with fuel costs, energy bills, and other cost-of-living increases.
It’s significant that the chancellor cannot apply all of his taxes to Northern Ireland because of the Northern Ireland Protocol, it shows it needs to be dealt with.
From Ben Lake, the Plaid Cymru Treasury spokesperson
Today‘s statement finally acknowledges that families are facing a cost of living crisis, but it is disappointing the chancellor failed to bring forward measures to actually address the scale of the problem. The seriousness of the crisis called for a fundamental change of approach, not further tinkering around the edges a broken strategy.
Plaid Cymru have long called for targeted support for people and businesses who are struggling with fuel costs. A 5p cut to fuel duty, while welcome, will still leave people in rural areas struggling to shoulder the cost of essential journeys, whilst giving a subsidy to the Chelsea tractors that pollute the cities. A targeted approach would have been fairer for both the public and the planet.
From Caroline Lucas, the Green party MP
This is from Nick Macpherson, a former Treasury permanent secretary, illustrating the “smoke and mirrors” quality of changes to the tax system – and why claims that taxes are being cut overall are best not taken seriously.
Union leaders have criticised Rishi Sunak for “tinkering around the edges” of the cost-of-living crisis.
The Unite general secretary, Sharon Graham, said:
With inflation at its highest for 30 years, Rishi Sunak’s spring statement just tinkers around the edges of this shocking cost-of-living crisis. Workers will still be facing sleepless nights worrying about how to make ends meet, overwhelmed by rocketing prices.
His spring statement does nothing to tackle the corporate elite, the billionaires who stash their loot but sack UK workers by Zoom. Once again, ordinary working people bear the broadest burden while the super-rich get off scot-free.
Dr Mary Bousted, joint general secretary of the National Education Union, said:
If the government is serious about protecting living standards and building a strong economy, it must reverse the real-terms cuts to teacher pay. Instead, with RPI inflation reaching 8.2% and in the midst of the worst cost-of-living crisis in decades, the government plans yet more real terms pay cuts for teachers.
The TUC general secretary, Frances O’Grady, said:
In the midst of the biggest wages and bills crisis in living memory, Rishi Sunak’s spring statement has failed families who need help now. We did not get the urgent help with soaring bills that families need, and the rise in the national insurance threshold will mostly benefit better-off households.
The small print shows that pay packets are now expected to fall in value by £11 a week this year. After 12 years of Tory government, Britain needs a pay rise, but this chancellor has no plan to get wages rising and give working people long-term financial security.
Manuel Cortes, the general secretary of the TSSA transport union, said:
This government is fuelling – quite literally – a car-led recovery instead of promoting climate friendly solutions such as public transport.
We should be making public transport cheaper in the face of spiralling, out-of-control fuel prices. Other countries are cutting the cost of public transport or making it free for commuters, but this government has increased rail fares and is failing to encourage more people to take public transport.
According to the Office for Budget Responsibility, the tax burden – taxation as a proportion of GDP – is now forecast to rise to levels last seen when Clement Attlee was prime minister even faster than previously expected. It is now due to peak at 36.3% (on the national accounts taxes measure) in 2025-26.
This chart from the Office for Budget Responsibility shows how real household disposable incomes per person are set for the largest fall in a single financial year since records began in 1956-57, down 2.2% in 2022-23.
The OBR has lifted its forecast for nominal earnings growth. Pay is expected to rise 5.3% this year, up from 3.9% forecast in October due to “tight labour market conditions” and as workers seek better-paid-jobs.
But wages will fall in real terms (after inflation) this year and next, meaning around five years of stagnation.
The OBR says:
Wage growth is not expected to fully compensate for higher inflation, much of which is externally driven, meaning that real wages fall in both 2022 and 2023.
Thereafter, earnings growth eases a little further, but inflation drops back more rapidly, resulting in a partial recovery in real wages in the final three years of the forecast. On a post-tax basis, real wages stagnate over much of the forecast period.
At a post-statement briefing a Treasury spokesman blamed inflation on the war in Ukraine and acknowledged that much of the help would not come until next year. He said:
The chancellor set out in his speech that obviously the costs of the war in Ukraine are going to have a domestic impact and he can’t fully protect people from all of those costs. But he’s set out a plan today that provides £22bn worth of support for households up and down the country next year as they grapple with some of these challenges.
Asked why there was little in the statement that would help those not working, earning too little to pay tax and pensioners, the spokesman pointed to the £500m increase in the household support fund administered by local councils for those most in need.
And here are some more lines from Rachel Reeves’s response to the spring statement in the Commons. Reeves accused the chancellor of living in “Sunakland”, an alternative reality. (See 1.30pm.) She said that, despite announcing tax cuts, overall Sunak was still putting up tax.
Despite the chancellor’s reluctant measures, the facts are that he is still taking money out of people’s purses and wallets with an increase in national insurance contributions.
The changes that he is making today beg the question, why did he embark on these changes in the first place, despite the warnings from the Labour party and from many many others?
She also said the national insurance increase remained a mistake.
The actual reality is that this chancellor’s failure to back a windfall tax and his stubborn desire to pursue a national insurance tax rise are the wrong choices.
In eight days, people’s energy bills will be rising by 54%, two weeks today the chancellor’s tax hike will start hitting working people and their employers.
His national insurance tax rise was a bad idea last September and he’s admitted it’s an even worse one today.
The chancellor is making an historic mistake. Today was the day to scrap the tax rise on jobs, today was the day to bring forward a windfall tax, today was the day for the chancellor to set out a plan to support British businesses.
Energy bills are set to rise around another 40% in October if wholesale energy prices remain as high as financial markets expect, the OBR warns.
That would push inflation to a 40-year high of 8.7% in the fourth quarter of 2022.
The cost of living hasn’t been rising that fast since the second oil shock pushed inflation into double digits in the late 1970s and early 1980s.
The energy price cap is already rising 54% in April, meaning average bills would be £1,971 per year.
A 40% increase in October, when Ofgem next adjusts the cap, could add nearly £800 more to bills — meaning more families would face the very painful choice between eating and heating.
The OBR also predicts inflation will average 4% in 2023 — double the Bank of England’s target, before dropping back to 1.5% in 2024.
Source: This post first appeared on The Guardian