Budget 2021: OBR forecasts council tax hike and rising cost of living will wipe out wage increases

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Disposable income in UK households is expected to remain stagnant over the next few years, as inflation results in a higher cost of living that wipes out income growth, according to the Office for Budget Responsibility (OBR).  

Budget 2021: OBR forecasts council tax hike and rising cost of living will wipe out wage increases
© Provided by The i Chancellor of the Exchequer Rishi Sunak did warn households their council tax was set for big increases over the next three years (Photo: Victoria Jones/PA Wire)

While the OBR painted a more positive overall economic picture for the chancellor, its fiscal review also predicted that by 2025 the average disposable income for households across all four UK nations would have risen by just 0.8 per cent.  

While the OBR points to a 3.6 per cent rise in wages and a further 1.5 per cent increase in other sources of income, this 5.1 per cent total rise in income is almost wiped out by a 4.3 per cent rise in the cost of living.  

In its Fiscal Review the OBR, which is funded by the UK Treasury to provide independent economic forecasts and analysis of the public finances, said: “The level of real household disposable income per person is similar in 2025 to our March 2021 forecast, as higher labour income, reflecting an upward revision to the labour share and to a lesser extent non-labour income, broadly offset higher prices.”   

Households will also be hit by a sustained rise in council tax payments each year up to 2025. 

A spokesman for the OBR told i: “Over the period of the spending review, we expect council tax rates to increase by 2.5 per cent to 3 per cent a year, and that is consistent with the vast majority of councils taking up the increased flexibility announced by the Treasury of up to 3 per cent a year – 2 per cent on core council tax plus 1 per cent on adult social care precept – without having to call a local referendum.” 

If local councils raises rates by as much a 3 per cent each year until 2025, the current average Band D council tax bill of £1,898 would increase to £2,074 by April 2024. 

In his Budget speech in the House of Commons, Rishi Sunak focussed on the positive elements of the OBR’s review, which showed that the UK economy will recover faster than expected from the pandemic with unemployment and debt levels also lower than first feared.  

The OBR said it now believes the economy will return to its pre-Covid level at the “turn of the year”, around six months earlier than predicted in March, as it delivered a raft of economic upgrades.  

Predicted long-term scarring effects of Covid-19 on the economy have also been scaled back by the independent forecaster, which has revised it down from a 3 per cent  economic hit to 2 per cent.  

The OBR is now forecasting that gross domestic product (GDP) will grow by 6.5 per cent in 2021, up sharply from the 4 per cent predicted in March.  

However, next year’s GDP outlook has been downgraded to 6 per cent  from 7.3 per cent forecast in March, though the OBR has upgraded its forecast for 2023 to 2.1 per cent from 1.7 per cent, with expansion now expected at 1.3 per cent in 2024 and 1.6 per cent in 2025.  

The bounce-back and enormous furlough support is also helping the UK jobs market weather the pandemic, with the OBR now expecting the unemployment rate to peak at 5.2 per cent, down from 5.6 per cent previously and the 12 per cent  initially feared.  

The OBR also lowered its borrowing forecasts, and now believes borrowing will fall to 7.9 per cent of GDP this year, from the 10.3 per cent or £234bn previously predicted. According to the OBR, borrowing will then drop to 3.3 per cent of GDP next year, then 2.4 per cent, 1.7 per cent, 1.7 per cent and 1.5 per cent in the following years, according to the OBR.  

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