The UK is on course for the longest period of falling living standards since records began in the 1950s, with the current crunch forecast to last longer than the post-crisis income squeeze, the Resolution Foundation has said in its Budget analysis.
The report Freshly Squeezed highlights the unprecedented scale of the economic downgrade handed down to the Chancellor by the OBR, and how this impacts on the public and families’ finances. The analysis finds that:
- The OBR has handed the Chancellor the biggest downgrade to productivity forecasts since its creation in 2010.
- On a ten-year rolling basis, productivity growth is set to fall to 0.1 per cent by the end of 2017, marking this as the worst decade for productivity growth since 1812 – when Napoleon was busy invading Russia.
- As a result the economy is on course to be £42bn smaller in 2022, compared to the March 2017 forecast.
Faced with these grim economic forecasts driving projections for an extra £30bn of borrowing by 2021-22, the Chancellor has chosen to accept that public finance deterioration and increase it by a further £15bn. In doing so, he has all but abandoned his main fiscal objective (and manifesto aim) of reaching an absolute surplus by the middle of the decade.
The Foundation notes that:
- If the Chancellor did decide to meet the Conservative Manifesto aim it would require a doubling of the pace of deficit reduction in the three years running up to 2025-26.
- A slight pause in cuts to day to day departmental spending (per person) is set to take place in 2018-19. However, budgets are still set to be 16 per cent lower in 2022-23 than in 2010-11. In contrast, capital spending per person is set to exceed pre-crisis levels by the start of the next decade.
Looking at how the revised economic forecasts affect household incomes, the analysis finds that:
- The current income squeeze is set to be longer (though shallower) than the post-crash squeeze, with real household disposable incomes set to fall for an unprecedented 19 successive quarters between 2015 and 2020.
- Despite welcome but relatively small shifts on Universal Credit, tax and benefit policies announced since Summer Budget 2015 are set to put downward pressure on living standards and upward pressure on inequality. The poorest third of households are set for an average loss of £715 a year by the end of the parliament, while the richest third gain an average of £185.
The Foundation’s analysis of the measures making up the Chancellor’s welcome focus on housing finds that:
- Additional housing capital investment is set to take spending to levels greater than the 2000s (outside the fiscal stimulus peak of 2008 to 2010) driving progress towards building 300,000 homes a year.
- The cumulative £3bn cost of the abolition of stamp duty for many first time buyers could have supported the building of 40,000 social rented properties or around 140,000 homes through the government’s own Housing Infrastructure Fund.
- The policy is set to cost £160,000 for every additional home owner created, sufficient for the Chancellor to have instead simply given people typically priced properties in over a quarter of local authorities in England and Wales.
Torsten Bell, Director of the Resolution Foundation, said “Following years of incremental changes, yesterday the OBR handed down the mother of all economic downgrades pushing up borrowing for the Treasury. While Philip Hammond chose to take a relaxed approach to additional borrowing, families are unlikely to do so when it comes to the deeply troubling outlook for their living standards that the Budget numbers set out. Families are now projected to be in the early stages of the longest period of continuous falls in disposable incomes in over 60 years – longer even than that following the financial crisis.
“On the substance of the Budget the Chancellor has made the right call in boosting housing investment and focusing on this key issue of intergenerational concern. However, yesterday’s stamp duty rabbit is in reality a very poor way to boost home ownership. Its £3bn cost could have been better spent building 140,000 new homes through the government’s own Housing Investment Fund.
“Faced with a grim economic backdrop the Chancellor will see this Budget as a political success. But that would be cold comfort for Britain’s families given the bleak outlook it paints for their living standards. Hopefully the OBR’s forecasts will prove to be wrong because, while the first sentence of the Budget document reads ‘the United Kingdom has a bright future’, the brutal truth is: not on these forecasts it doesn’t.”