Workers in Britain are on course to suffer an unprecedented 15 years of lost earnings growth and have been warned to prepare for a third successive parliament of austerity by a leading thinktank.
Analysing Philip Hammond’s spring budget, the Institute for Fiscal Studies (IFS) said that after suffering a lost decade of earnings growth, households were now about to be hit by big welfare cuts.
Paul Johnson, the thinktank’s director, highlighted permanent scars to the UK economy from the global financial crisis and said that almost a decade on the prospects for income and earnings growth remained weak.
“On current forecasts average earnings will be no higher in 2022 than they were in 2007. Fifteen years without a pay rise. I’m rather lost for superlatives. This is completely unprecedented,” he said at the IFS’s traditional post-budget day briefing.
Johnson said the latest economic outlook from the government’s independent forecaster, the Office for Budget Responsibility, implied that in the wake of the financial crisis the UK had suffered permanent losses to productivity – a measure of output per hour.
“All of the productivity – and with it earnings growth – we would normally expect has been lost forever. This remains the big story of the last decade – a decade without growth, a decade without precedent in the UK in modern times,” he said.
The IFS noted the OBR’s forecasts for the public finances left the UK on course to borrow £20bn in 2020, which is £30bn more than intended a year ago.
“That leaves a lot of work to do in the next parliament to get to the planned budget balance. It looks like being, I’m afraid, a third parliament of austerity,” said Johnson.
Similarly, he underscored welfare cuts announced under Hammond’s predecessor George Osborne that start to come into force next month. “These will have much bigger effects on people’s incomes than anything announced [on Wednesday].”
The IFS had a relatively positive appraisal of the controversial changes made by Hammond to taxes paid by the self-employed.
Johnson said increases in national insurance contributions (NICs) for the self-employed represented a “modest but welcome change” designed to create a slightly less unequal playing field between the self-employed and employees.”
The IFS warning on incomes follows the claim earlier on Thursday by the Resolution Foundation that the UK is in the midst of the worst decade for pay growth since the Napoleonic wars of 1803–1815.
In a grim assessment of the new budget forecasts, the thinktank said families would miss out on £12,000 of pay growth by 2020, the worst decade for 210 years.
Workers will be hit with falling real pay, where inflation exceeds wage growth, in the coming months, Resolution said. Real average earnings are only expected to return to their pre-crisis peak by the end of 2022.
Torsten Bell, the director of the Resolution Foundation, said: “The big picture from [Wednesday’s] budget is that the big squeezes on both the public and family finances have been prolonged well into the 2020s.
“While the Office for Budget Responsibility at least delivered some good news on borrowing, the family finances picture has actually deteriorated since the autumn statement. Britain is set for a return to falling real pay later this year, with this decade now set to be the worst for pay growth since the Napoleonic wars.
Bell said that some households would feel the pinch more than others. “The combination of weak pay growth and over £12bn of benefit cuts means that for the poorest third of households this parliament is actually set to be worse than the years following the financial crisis.”
Resolution calculates that a single person working full time on the minimum wage – earning £13,150 – will be £380 worse off by 2020. A dual-earning couple with two children and combined earnings of £29,020 will be £360 a year worse off by 2020.
Anita Charlesworth, director of economics at The Health Foundation, said the chancellor had rebuffed calls for more health spending, but resources in the NHS were thin.
“The next parliament will need to find an extra 1% of GDP in austerity measures and 1% extra for the NHS. I don’t know how we do that within the existing tax base,” she said.
The amount of tax Britons pay as a percentage of GDP is due to hit a 30-year high in 2019 of 37.5%.
Tony Travers, a local government expert at the London School of Economics, said councils were shouldering the burden of austerity and would soon be confined to providing only statutory services such as adult and children’s social care.
“There is a straight line of falls in discretionary spending that ends in the next parliament at zero, leaving no money for anything other than the legal minimum,” he said.
