Boris Johnson’s government has set a course for a “high-tax, big-state economy” with a budget that will raise household tax bills by £3,000 on average by 2027, according to an analysis by an independent thinktank.
The Resolution Foundation said that despite a spending spree, real wages would fall again next year. The UK is “still in the midst of its weakest decade for pay growth since the 1930s,” it said.
Sunak portrayed the budget as preparing the “high-wage” economy for the “post-Covid” era, as stronger economic forecasts gave him room to increase spending on government departments by £150bn.
However, the Resolution Foundation said real wages would grow by just 2.4% between May 2008 (as the financial crisis hit) and May 2024, compared with 36% real wage growth between May 1992 and May 2008.
The hit to real wages would be caused by rising inflation leading to a “flat recovery for household living standards”, amid surging energy prices and persistent supply chain problems, the thinktank said in analysis published on Thursday morning.
The analysis found the combined impact of the budget policies would increase incomes of the poorest fifth of households by 2.8% by 2025, while incomes for people on middle incomes will fall by 2%, and the highest-earning fifth will fall by 3.1%.
Rachel Reeves, Labour’s shadow chancellor, said Sunak’s lack of action on the cost of living showed he was describing a “parallel universe”.
Sunak told Conservative MPs on Wednesday evening that in future he planned to use “every marginal pound” to lower taxes as the Conservative party’s eyes turn towards a general election in 2023 or 2024.
The thinktank’s analysis showed that tax as a share of the economy will be at its highest level since 1950 by 2026-27.
Torsten Bell, the Resolution Foundation’s chief executive, said: “The chancellor has set out plans for a new high tax, big state economy.
“Higher taxes aren’t a surprise given the UK is combining fiscal conservatism with an ageing society and a slow-growing economy. But it is the end of low-tax conservatism, with the tax take rising by £3,000 per household by the middle of this decade.”
The major beneficiary of the spending increases has been the National Health Service, which will have taken up £84bn of the £111bn annual increase in spending controlled by Whitehall by 2024-25.
The spending announced by Sunak will only go part way towards reversing the austerity cuts implemented by the former chancellor George Osborne. The Resolution Foundation found that a third of those cuts will have been reversed by 2025, with work and pensions and transport budgets still down by 40% and 32%.