UK faces years of high taxes, warns think tank

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Prime minister Boris Johnson (R) with chancellor Rishi Sunak during a visit to Fourpure Brewery in London, after Sunak delivered his budget to the House of Commons. Photo: PA

New analysis of chancellor Rishi Sunak's budget, which was announced on Wednesday, says the government is setting the stage for the “end of low tax conservatism”.

According to the Resolution Foundation's overnight analysis of the UK Spending Review, the plan comes in contrast to the pledge of a high wage economy made by prime minister Boris Johnson. It also contradicts low tax plans favoured by many Tory MPs.

A better-than-expected outlook for public finances handed down by the Office for Budget Responsibility laid the foundations for the budget, as the UK saw £141bn ($194bn) lower borrowing windfall. However, it also comes amid a backdrop of deteriorating family finances, with household incomes set to stagnate as a result of rising inflation.

The Resolution Foundation said that half of that windfall has been used to increase public spending, and half to meet the chancellor’s new fiscal rules.

With higher growth, inflation and public spending than previously expected, combined with tax rises already in train, Resolution Foundation warns that Britain could be set for a flat recovery for household living standards.

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In 2026-27 tax as a share of the economy will be at its highest level since 1950, amounting to a £3,000 increase per household since Boris Johnson became prime minister.

The combined impact of polices announced by the chancellor — including on universal credit (UC), reduced alcohol and fuel duties, and higher council tax, income tax and national insurance — will deliver a 2.8% income boost to the poorest fifth of households by the middle of the decade, but an income hit of 2% to middle income households, and a 3.1% to the richest fifth of households.

Alongside this, the reduction in the taper rate in UC will bring an additional 380,000 families into the benefits system next year.

Of the 4.4 million households on UC, around three-quarters — 3.2 million households — will be worse off as a result of decisions to take away the £20-a-week uplift, and then give back via the chancellor’s new UC measures in the budget. Only 1.2 million households currently on UC are set to gain from these changes, the Foundation said.

“While tax revenues and NHS spending will be growing rapidly in this economy, growth in pay packets and family incomes looks far more anaemic — a huge challenge that the welcome rise in the national living wage and boost to universal credit eased, but did not overcome,” said Torsten Bell, CEO of the Resolution Foundation.

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There's also the matter of poor pay growth on the horizon. Real wages are set to fall again next year, with the UK still in the midst of its weakest decade for pay growth since the 1930s.

Resolution Foundation notes that real wages are on course to grow by just 2.4% between May 2008 and May 2024 — a far cry from the 36% real wage growth experienced between May 1992 and May 2008.

The effects of former chancellor George Osborne's austerity measures have only been partially reversed.

A third of the cuts to real day-to-day spending per-capita in unprotected departments since 2009-10 will have been reversed by the middle of the decade. Real day-to-day spending in Work and Pensions and Transport will be down 40% and 32% respectively on 2009-10 levels.

“With Britain still getting to grips with the impact of COVID, Brexit and the net zero transition over the coming decade, the country remains in need of an economic strategy that steers us through this period of huge economic change while addressing long standing challenges of low productivity and high inequality,” said Bell.

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