Millions to be worse off due to rising taxes and inflation, says IFS

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Millions will be left worse off as low-income households face “real pain” due to Rishi Sunak hiking taxes as costs rise, a leading economic think tank has warned.

The Institute for Fiscal Studies (IFS) said in its comprehensive Budget analysis that the outlook for living standards does not match the Chancellor’s upbeat tone.

After Mr Sunak claimed it was a Budget to “usher in a new age of optimism”, IFS director Paul Johnson said voters “may not get much feelgood factor” with high inflation, rising taxes and poor growth “undermined more by Brexit than by the pandemic”.

He said these factors will see living standards “barely rising and, for many, falling over the next year” as he described the almost two decades of minimal growth in wages as “unprecedented”.

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The Chancellor used his Budget to outline tax cuts for businesses, a softening of the cut to Universal Credit and a rise to the “living wage” as the nation recovers from the Covid-19 pandemic.

But there were warnings of hardship for ordinary people despite the “real and substantial” rises in public spending as they get hit by the 1.25% hike in national insurance and rising inflation.

The IFS said that finances in many areas will be “substantially less” in 2024/25 than back in 2010, highlighting spending per student in further education and sixth form colleges as one area where levels will be “well below”.

“This is not a set of priorities which looks consistent with long-term growth – or indeed levelling up,” Mr Johnson said.

With the possibility of inflation hitting the highest level in three decades, he warned that “millions will be worse off in the short term”.

Mr Johnson said welfare payments will rise by around 3%, while inflation could be 5%.

“That will be a real – if temporary – hit of hundreds of pounds a year for many benefit recipients,” the director added.

“We are not at 1970s levels of inflation but we are now experiencing enough inflation that real pain will be felt as low-income households – most of whom have little in the way of financial assets – wait more than a year for their incomes to catch up.

(PA Graphics)

“For some in work that may never happen.”

The around four million households on Universal Credit and out of work will suffer the £1,000 annual loss of the removal of the £20 weekly uplift and will not benefit by the changes to the “taper” rate and the boost to the minimum wage.

Having taken the overall tax burden to the highest level since the recovery from the Second World War, Mr Sunak has insisted it is his ambition to reduce taxes by the next general election.

But the IFS said the Chancellor will have to develop “new and radical ways” to fulfil his ambition after swelling the state to its largest level in decades.

Mr Johnson stressed that Mr Sunak was doing this with “almost entirely a set of policy choices unrelated to the pandemic” by responding to Government departments having been “starved of funding for a decade” under austerity.

The IFS director said: “He would be helped by an economy growing rather more enthusiastically than it has managed for some time now.

“Finding the key either to reforming public services to make them cheaper and more efficient, or to getting higher economic growth, are challenges which have defeated most of his predecessors.”

Mr Johnson said if the current forecasts are correct then the Chancellor could be in line for a pre-election giveaway of “perhaps £7 billion and still maintain some fiscal headroom”.

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“But, given his newly stated fiscal targets, it’s not a huge or comfortable cushion,” he added.

The IFS shed further light on how the education budget will remain low compared with other departments as growth in public spending does not undo the cuts of austerity.

The Ministry of Justice will enjoy 4% rises but still sees its funding 12.2% below pre-2010 levels, while education will see a 2% rise in its budget – below the average announced.

Ben Zaranko, research economist at the IFS, said: “It’s notable that education is doing not just worse than the average department but worse than the average department outside of health.

“I think that tells you something about this Government’s seeming priorities.”

Local government will also be squeezed despite the 3% on average rise, with much of that expected to be spent on social care.

Grant funding for existing services will be £1.6 billion next year but will then be frozen, meaning ongoing pressures will need to be met through increases in local taxes such as council tax, Mr Zaranko said.

He added: “The Government seems to be saying that councils will be allowed to raise council tax by less than they have been able to in the recent past.”

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