Cost of Labour: Families face FIVE years of stagnating living standards as taxes rise to record high
Britain faces five years of stagnating living standards as the nation’s tax burden rises to an all-time high, dismal new Budget forecasts reveal.Household disposable income, after inflation, will grow by just a quarter of a per cent a year on average according to the Office for Budget Responsibility (OBR).And as painful income tax freezes bite, the overall tax burden will climb to a record 38 per cent of national income.The UK’s fiscal watchdog outlined the bleak picture as it also downgraded prospects for the wider economy for every year from 2026.And it gave a cautious verdict on the Chancellor’s plans to balance the books, which will involve more borrowing over the next few years before a sharp tightening of the belt after the next election.Even if she does hit her fiscal targets, debt will still soar to a staggering £3.5 trillion or 96 per cent of the size of gross domestic product (GDP) – twice the level of a typical advanced economy – with debt interest payments alone climbing to £140 billion a year.It was described as a ‘spend now, pay later’ Budget by the Institute for Fiscal Studies (IFS), a leading economic think-tank.
The sluggish outlook for living standards was worse than expected at the time of the Chancellor’s spring statement in March – despite Labour’s claim to be tackling the cost of living.Over the past decade, real household disposable income has typically grown by 1 per cent on average, the OBR said. But ‘weaker real term wage growth and rising taxes explain the slower growth’ explain the downgrade in its latest forecastOBR official Professor David Miles said it was a ‘disappointingly low number’.He added: ‘There are some pretty big tax increases down the road. It is hardly surprising given those things that you get pretty low growth in real household disposable income.’It means living standards will have increased by a ‘paltry’ 0.5 per cent over the course of the current parliament, the second worst since records began in the 1950s, according to the Resolution Foundation think-tank.The downgrade is partly down to a worsening outlook for the cost of living.Inflation is on course to be higher than previously forecast next year and not fall to its 2 per cent target until 2027, a year later than previously thought.The latest increase in Britain’s tax burden comes after Ms Reeves extended an ongoing freeze on income tax thresholds by a further three years.It means the so-called stealth tax started under the Tories will eventually have raised a total of £67 billion, the OBR said.
According to the Resolution Foundation think-tank, when combined with the previous Budget, the Labour government is on course to have raised taxes by an annual £56 billion by 2028/29.The OBR’s forecasts, published alongside the Budget, upgraded gross domestic product (GDP) for this year from 1 per cent to 1.5 per cent.But the outlook for 2026 has been cut sharply from 1.9 per cent to 1.4 per cent and has also been downgraded for every year until 2029.That is partly as a result of a widely-expected cut in the outlook for productivity growth – the ability to do more with less.Meanwhile, the OBR forecasts that borrowing this year will be £21 billion higher than previously expected. It has also been upgraded for the following three years though by 2029-30 will be £6 billion lower. Borrowing for 2024-25 has also turned out to be £12 billion more than previously thought.It means that added together, borrowing is on course to be £69billion higher than predicted back in March.The ‘headroom’ for meeting the Chancellor’s targets to bring down borrowing and debt will double from £10billion to £22billion – but still remains a ‘small margin’ given economic uncertainties, the OBR said.‘While this Budget addresses some fiscal risks and increases the margin held against the Government's fiscal targets, it still leaves the UK public finances relatively vulnerable to future shocks,’ the report said.And there was little sign of progress against challenges posed by Britain’s sicknote epidemic.Instead, the OBR said rising levels of inactivity due to sickness as well as the ageing population would mean more than a third of the labour force still languishing without a job by the end of the decade.Shevaun Haviland, Director General of the British Chambers of Commerce said: ‘Many will be disappointed that this Budget did not provide a more compelling blueprint to deliver transformational growth.’Rupert Harrison, former advisor to then Chancellor George Osborne and now employed by bonds giant Pimco, said: ‘The Budget has added to medium term concerns about this Government’s ability to control spending and deliver the falling deficit path set out in the OBR forecasts.‘The Chancellor is asking markets to trust her commitment to be fiscally prudent in the future, just not yet.’Accountancy firm Blick Rothenberg went further, hitting out at changes to dividend, property and savings tax to describe it as ‘one of the most damaging Budget statements in living memory’.AJ BellAJ BellEasy investing and ready-made portfoliosHargreaves LansdownHargreaves LansdownFree fund dealing and investment ideasinteractive investorinteractive investorFlat-fee investing from £4.99 per monthFreetradeFreetradeInvesting Isa now free on basic planTrading 212Trading 212Free share dealing and no account feeAffiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.Compare the best investing account for you
