Households are predicted to experience a substantial decline in their disposable income over the coming years, according to a prominent think tank. The analysis following the recent Budget indicates that average disposable incomes are projected to grow by a mere 0.5% annually during this parliament, contrasting starkly with the over 2% growth achieved in previous parliaments from the mid-1980s to mid-2000s, as highlighted by Helen Miller, the director of the Institute for Fiscal Studies (IFS).
The IFS criticized Chancellor Rachel Reeves’ Budget as “underwhelming,” noting that spending would be front-loaded in the next three years, leading to increased borrowing. Subsequently, larger tax hikes are expected to create a £22 billion buffer to mitigate future economic shocks.
Identified as positive aspects by the IFS were the efforts to expand the “headroom” and a proposed £7 billion taxation plan for electric vehicles, along with clearer strategies for funding special educational needs and disabilities (SEND). The removal of the two-child limit on welfare was commended for its cost-effective approach to reducing child poverty.
However, the IFS cautioned that the Labour Party might struggle to adhere to its spending plans preceding the upcoming general election. Miller expressed skepticism regarding Labour’s fiscal strategy, emphasizing the challenges in implementing the proposed spending plans and delayed tax increases.
Moreover, the decision by Labour to prolong the freeze on the income tax threshold until 2031 was deemed a departure from the party’s manifesto commitments, aimed at addressing public finance deficits.
Prime Minister Keir Starmer defended Labour’s adherence to its pre-election pledges, acknowledging the necessity for all citizens to contribute, despite potential tax increases.
The IFS analysis affirmed expectations of this parliament being characterized by the largest tax increases on record. Additionally, it revealed that nearly 70% of those affected by the new “mansion tax” would be concentrated in London and the South East, with a significant portion residing in specific affluent London boroughs.
The IFS also cautioned that the benefits from the energy bill reduction announced in the Budget would be short-lived, estimating lower average savings than government projections. Criticism was reiterated against successive governments for not implementing comprehensive reforms to the UK’s tax system, as the proposed solutions were viewed as temporary fixes rather than addressing fundamental issues.