Key Highlights
- The Institute for Fiscal Studies (IFS) warns of a “dismal” rise in living standards for households after the recent Budget.
- Average disposable income is expected to increase by just 0.5% per year over the next five years, according to IFS analysis.
- Labour’s manifesto promise not to raise taxes on working people has been accused of being broken due to National Insurance and tax threshold changes.
- The government maintains that it has kept its promises despite facing criticism from the think tank for breaching pledges on living standards.
The Budget Fallout: IFS Slams Rise in Living Standards
Households across the United Kingdom are facing a “truly dismal” increase in their spending power, according to the Institute for Fiscal Studies (IFS). This bleak outlook comes as the government’s official forecaster warns that average disposable income—money available after tax—is set to rise by only 0.5% annually over the next five years. This news has raised eyebrows among policymakers and citizens alike, with concerns echoing about whether the recent Budget measures are sufficient in addressing the nation’s financial challenges.
IFS Analysis: A Disappointing Outlook
In an interview with the BBC, Helen Miller, the head of the IFS, emphasized that the projected increase in disposable income is disappointing. “Before this Budget, the UK was faced with lacklustre economic growth, stagnating living standards, and a dizzying array of fiscal pressures,” she stated. “The same is still true after this Budget.” Miller’s comments echo broader concerns about the state of the economy and whether the government has effectively addressed these issues.
Breaking Promises: Labour’s Pledge on Taxes
The IFS’s criticism centers around the government’s handling of National Insurance, tax thresholds, and other fiscal policies. According to Miller, these changes amount to a breach of Labour’s manifesto promise not to increase taxes on working people. The Institute argues that measures such as capping salary sacrifice pension payments and freezing certain tax thresholds have directly impacted disposable income negatively.
In response, Prime Minister Rishi Sunak told the BBC that his government has kept its commitments. “Labour made ‘a number of commitments in our manifesto, which we have kept,'” he said. However, this statement is met with skepticism from the IFS and other financial analysts who point out that the overall impact on living standards remains concerning.
Government’s Response: A Minimized Impact
The government has attempted to downplay the criticism by highlighting other measures aimed at reducing the cost of living. Chancellor Rachel Reeves announced several policies, including freezing NHS prescription charges and regulated rail fares in England, as well as scrapping green levies added to energy bills. Additionally, she extended the freeze on income tax thresholds for a further three years beyond 2028.
Reeves also imposed a £2,000-a-year cap on pension contributions from 2029 through salary sacrifice arrangements before National Insurance payments are due.
While these measures are intended to alleviate some financial pressures, they have been met with mixed reactions from the public and experts alike. The chancellor has defended her decisions by stating that “I absolutely wanted to bear down and reduce the cost of living because for most people, that will be the single most important thing.”
Expert Analysis: Growth vs. Reality
In a broader context, the IFS’s analysis underscores the ongoing challenges faced by the UK economy. Helen Miller noted how the Office for Budget Responsibility (OBR)’s overall forecast downgrade was minimal and there was “no big fiscal repair job” to do. However, she criticized the government for not taking more significant steps to drive economic growth, which has been identified as a key mission in recent years.
Miller suggested that the government could have reformed the tax system to boost the economy further.
She also highlighted that there are “hard yards to do” in areas such as competition policy, regulation, and education. These recommendations come at a time when the UK is grappling with high inflation rates and rising living costs, making the need for effective economic policies more pressing than ever.
The ongoing debate over the Budget’s impact on living standards reflects a broader conversation about the effectiveness of current fiscal policies in addressing the nation’s financial challenges. As the government continues to navigate these complex issues, the opinions of think tanks like the IFS will remain crucial in shaping public and political discourse around economic policy.
