Jeremy Hunt pushed back on Friday against criticism that his £55bn fiscal squeeze unfairly targets middle earners, as new data indicated that UK workers will endure the longest period of wage stagnation for almost two centuries.
Hunt’s Autumn Statement on Thursday included £30bn of spending cuts and £25bn of tax rises in a bid to restore Britain’s credibility and fight soaring inflation. As a leading think-tank said the country had entered a new era of higher taxation and public sector austerity, the UK chancellor argued the challenge could not be just met by raising revenue from the wealthy.
“It is not possible to raise £25bn of taxes just focusing on a very small group of very rich people and I am being very open about that,” he told the BBC.
But the scale of the problems facing the country as a whole was indicated by data from the Resolution Foundation think-tank, which said on Friday that British workers were “living through a two-decade wage stagnation”. The Office for Budget Responsibility forecast on Thursday that average real wages will not regain 2008 levels until 2027.
Such a prolonged stagnation in real wages has not been experienced in the country since the 1820s, according to figures calculated by the Financial Times based on long run estimates of UK economic statistics.
The Resolution Foundation calculated 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 “stealth” tax increases announced by the chancellor, 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. Poorer households would be compensated with inflation-adjusted benefits and pensions.
Real disposable incomes are set to fall 7.1 per cent over the next two years, the biggest fall for six decades, according to the OBR’s estimates.
But Ben Nabarro, chief UK economist at Citi, said Hunt’s tax increases and spending cuts were “the bare minimum” necessary to restore credibility to the UK’s public finances and not enough to prevent the Bank of England from raising interest rates higher.
The investment bank raised its forecast of interest rates after the Autumn Statement, saying that fiscal policy on the “never, never” would require the BoE to be more aggressive and raise interest rates from the current 3 per cent rate to 4.25 per cent.
Nabarro added that the UK government’s unwillingness to take more decisive action to lower government borrowing suggested “the UK seems decidedly short of not just fiscal, but political space”.
Opposition parties have accused the Conservatives of unnecessarily squeezing middle earners. Speaking on Friday to ITV, Labour’s shadow chancellor Rachel Reeves said ordinary working people “saw their pockets picked” due to the implementation of a “whole range of stealth taxes and council tax increases”.
Liberal Democrat treasury spokesperson Sarah Olney warned that “the already squeezed middle” were being “pushed to the brink” by the government’s policies.
Conservative-backing newspapers have also attacked the government, with the Daily Telegraph accusing Hunt of “clobber[ing] workers with tax rises” and the Daily Mail splashing “Tories soak the strivers” on its front page.
James Smith, research director at the Resolution Foundation, said there was no avoiding “Britain is getting poorer” in an energy shock and the chancellor had to decide who paid the price.
“[Hunt] has decided that households will do so with higher energy bills, higher taxes, and worse public services than previously expected. Whether or not making the choices was tough, the reality of living through the next few years will be,” he said
Paul Johnson, director of the Institute for Fiscal Studies, another leading think-tank, said higher taxes were almost certainly “here to stay”.
As the IFS marked what it said was a “new era” of high taxes and austerity, it said the tax burden would settled “at its highest sustained level in history relative to national income”. According to its calculations, the burden will be at least four percentage points of GDP higher than it has been for most of the last 70 years — the equivalent of £100bn.
“We are . . . reaping the costs of a long-term failure to grow the economy, the effects of population ageing, and high levels of past borrowing,” Johnson said. “The truth is, we just got a lot poorer. We are in for a long, hard, unpleasant journey.”