UK living standards to stagnate even after Covid crisis fades, warns thinktank

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The real earnings of UK workers will fall this year and remain stagnant after that despite a strong economic recovery from the coronavirus pandemic, according to analysis of the budget that suggests the government will oversee one of the worst periods for UK living standards on record.

Incomes will lag behind inflation during 2021-22 – meaning living standards will drop – and will only rise by an average of 0.3% annually over the course of the next four years, according to the Resolution Foundation, an independent thinktank.

It will be the worst inter-election period for real household disposable income on record, barring the short parliament of 2015-17, when David Cameron and then Theresa May were prime ministers. That parliament was marred by a spike in inflation after the EU referendum result.

The overnight analysis of Wednesday’s budget suggested that the chancellor, Rishi Sunak, would have significantly more work to do if the government was to improve UK living standards – or to reach his stated goal of reducing the share of public net debt relative to gross domestic product.

Sunak combined large spending pledges in the short term aimed at helping the UK economy to recover from the pandemic with large tax rises later in the parliament.

He told MPs that the minimum wage would rise from 1 April to £8.91 an hour for workers 23-years-old or older. Currently, those 25 and over receive £8.72 an hour, and those between 21 and 24 receive £8.20.

The uplift in wages for 2 million of the lowest paid workers will only partially offset cuts in benefits that will leave many of them worse off.

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The analysis suggested the income of the poorest British households would be among the worst affected even as basic benefits are cut to levels not seen since the 1990s. It would drop by 7% in the second half of the 2021-22 tax year after Sunak set a course to remove a £20 weekly uplift to universal credit payments after September, the foundation said.

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Torsten Bell, the chief executive of the thinktank, said Sunak had “gone big” on support for the recovery now and tax rises in future.

“This is broadly the right approach to take in terms of protecting the economy now, securing a recovery next, and repairing the public finances later,” Bell said.

“But the details of his plans leave serious questions to be answered about whether enough has been done to support households in the recovery to come, how credible it is that further reductions in planned spending can be delivered, and if the UK’s public finances have really been put on a sustainable footing long term.”

Bell added that the improving outlook for economic growth next year would not feed through into a boom for living standards, with unemployment forecast to rise and household incomes to fall.

“Long-term economic scarring also means that this is set to be the worst parliament for living standards growth on record, bar the short-lived 2015-17 term. Austerity will also in practice continue for many public services as further cuts were pencilled in,” he said.