UK households to be £1,900 poorer by 2025, think-tank says

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The current UK parliament is on track to be the worst on record for household income growth, according to a think-tank analysis that lays bare the parlous state of living standards underlying this week’s Autumn Statement. 

Real household disposable income per head is projected to fall by 3.1 per cent between December 2019 and January 2025, the Resolution Foundation said on Thursday, leaving households on average £1,900 poorer at the end of the period. 

The deterioration reflects the corrosive impact of high inflation, alongside poor economic growth and a rising tax burden. Despite chancellor Jeremy Hunt’s tax-cutting measures in the Autumn Statement, taxes are on track to rise by 4.5 per cent of gross domestic product between 2019-20 and 2028-29, equivalent to £4,300 per household, the think-tank added.

In his Autumn Statement on Wednesday, Hunt outlined cuts to personal and business taxes as he declared the government had “halved inflation, reduced our debt and grown our economy”.

Inflation slowed to 4.6 per cent in October thanks to sharply falling energy prices, according to official data published this month, well below the 6.7 per cent pace recorded for September.

However, his words were accompanied by a downbeat outlook from the Office for Budget Responsibility. The fiscal watchdog cut its growth forecast, lifted its inflation projection and found only a “modest” economic uplift from the chancellor’s pro-growth measures. 

Hunt announced a £20bn cut in business and personal tax that included a reduction in the main rate of national insurance by 2 percentage points to 10 per cent from January 6 — the start of what is expected to be an election year.

However, the Resolution Foundation found that the effects of the tax and benefits measures would not be evenly shared.

As a result of Wednesday’s announcements, the richest fifth of households will be better off by an average of £1,000 in 2027-28, driven by the national insurance cuts, while those in the lowest fifth are set to gain just over £200.

Although lower-income households will be boosted by new support with rents, some of the gains will be offset by a toughening of criteria for health-related benefits. 

The picture is different when taking account of the sum total of the tax and benefit measures announced during the current parliament. When these are factored in with Wednesday’s measures, the richest fifth of households are on track to lose £1,100 on average, while the poorest 20 per cent gain an average of £700, according to the Resolution Foundation 

Despite the fanfare over the tax reductions, economists warned that the bigger picture was one of a steadily rising tax burden in the UK. The OBR found that Hunt’s personal and business tax cuts would reduce the tax burden by half a percentage point, but that it is still on track to rise in each of the next five years to a postwar high of 38 per cent of GDP. 

Paul Johnson, director of the Institute for Fiscal Studies think-tank, said the cut to national insurance contributions “pales into relative insignificance” next to the increase in personal taxes created by the government’s decision to impose a six-year freeze on tax allowances and thresholds. 

Freezing thresholds, rather than raising them in line with inflation, increases tax receipts as rising wages tip more workers into the tax system or on to higher rates — a phenomenon known as “fiscal drag”.

The higher outlook for inflation had added £14bn to the size of that fiscal drag since March, the IFS said, meaning that even after the national insurance cut the level of personal taxation expected in 2027-28 was much the same. 

The IFS also noted that the decision to cut national insurance, rather than income tax, would help narrow the gap between working-age adults and pensioners — even though the latter still pay less tax on the same income, and will see the state pension rise by more than working-age benefits.