Warning of almost 20 years of pay stagnation

The UK is heading for nearly 20 years of lost pay growth, a think tank which focuses on low and middle earners says.

The Resolution Foundation said that, after taking account of rising prices, the average wage will not regain its 2008 level until 2026.

The body also said that Wednesday’s Budget will mean a net tax cut of £9bn is taking effect in an election year.

A separate think tank said there was “a conspiracy of silence” between the main parties over tax and spending choices.

The Institute for Fiscal Studies (IFS), a leading economic research group, said the next parliament could “well prove to be the most difficult of any in 80 years for a chancellor wanting to bring debt down”.

Under the current government’s self-imposed fiscal rules, debt must be falling as a proportion of the size of the economy in five years’ time.

The Resolution Foundation’s analysis of the Budget found that despite the government’s official forecaster cutting its for forecast for inflation – the rate at which prices rise – real average wages faced “a staggering near-two lost decades of pay growth”.

It said that if pay had continued to grow at the same pace seen before the 2008 financial crisis, the average worker in 2023 would have been around £14,000 better off.

The foundation also said that while measures announced in the Budget meant a net tax cut of £9bn in 2024, that was dwarfed by an estimated £27bn of tax rises that came into effect last year – and a further £19bn coming in after the election.

The Budget saw the chancellor cut National Insurance by 2p in the pound, and also included increases to child benefit salary thresholds.

The Resolution Foundation calculates that four-fifths of employees will pay less tax in the coming year, with an average gain of £450. But taxpayers earning £19,000 or less will be worse off because, as more of their pay is dragged above the frozen tax-free allowance of £12,570, they will lose more than they will gain from rate cuts.

It said that while more than three-quarters of the personal tax cuts announced in Wednesday’s Budget go to the richest half of households, there is a different picture when all the tax and benefit policies announced in this parliament – starting in 2019 – are analysed.

“Middle earners have come out on top, while taxpayers earning below £26,000 or over £60,000 will lose out. The biggest group of losers are pensioners, who face an £8bn collective hit,” said Torsten Bell, chief executive of the Resolution Foundation.

He added that policy changes seen in the current parliament “reinforces the sense that the government has reversed course from the approach that dominated during the 2010s”.

“Back then, support was focused on pensioners and takeaways on poorer, younger households. This time it is those aged over 65 and on the highest incomes who are set to lose most.”

The IFS said that the tax cuts announced in the Budget would not make up for the impact of tax increases and rising prices.

It said households would be worse off at the election than they were at the start of this parliament.

IFS director Paul Johnson said that the next government was likely to face some “eye wateringly tough choices” on tax and spending to stabilise debt as a fraction of national income.

In the Budget, Jeremy Hunt said he would keep the planned increase in day-to-day government spending at 1% above inflation every year until 2029.

However, as some departments like health and schools have protected budgets, that means others such as justice and local government could see significant cuts.

Unprotected departments could face day-to-day cuts of up to £20bn, Mr Johnson warned, despite the fact that “tax has risen to a higher fraction of national income than it has ever been in my lifetime, and I don’t expect it to return to its previous level for the rest of my lifetime”.

“Government and opposition are joining in a conspiracy of silence in not acknowledging the scale of the choices and trade-offs that will face us after the election,” Mr Johnson said.

“They, and we, could be in for a rude awakening when those choices become unavoidable.”