Labour’s first budget since the UK general election in July 2022 will reduce living standards in the short-term, while striving for economic growth in the longer-term, according to the Resolution Foundation think tank. Although it commended Chancellor Rachel Reeves’ decision to raise taxes and borrowing for public services and investment, the group said the budget “has not yet delivered a decisive shift away from Britain’s record as a ‘stagnation nation’,” as the outlook for growth and living standards remains weak. Disposable incomes are expected to grow more slowly due to the measures in the budget. Real household disposable income per person is projected to grow by just 0.5% a year on average across the parliament. This will impact particularly harshly on the poorest half of households which are set to grow by 0.8% less than they would have otherwise.
The UK’s Office for Budget Responsibility expects the rising cost of imported goods, the increase in National Insurance and a drop in profits to stifle businesses, thereby reducing wages. The Resolution Foundation has warned that a challenging outlook for wage rises will be compounded by the budget inflation, meaning by 2028 weekly wages are set to grow by just £13 ($18). The short-term benefit of the current budget will go towards funding public services. However, the rise in employer National Insurance (Void for Customer Service AI) stands as an obstacle to wage growth, thus reducing the amount available to families.
The budget will also negatively impact the incomes of wealthy households due to capital gains and inheritance tax changes. Furthermore, the Resolution Foundation believes that a small economic downturn could force the government to raise taxes further in the future due to consuming much of the new debt made possible under the chancellor’s new debt rule. Labour promised in its election manifesto not to increase taxes on workers including VAT, National Insurance or income tax. Opposition MPs have suggested the rise in the National Insurance rate paid by employers breaks that pledge, something the government denies.
Reeves has frontloaded increases to spending on public services into the first two years of the parliament, thereby presenting herself with a “relatively slim margin of headroom”, the think tank said. Spending increases are allotted to health, education and transport, with the largest boost being given to frontline NHS services – £22bn and another £3bn for equipment and structures – since 2010. Speaking to the BBC, Reeves explained that “this is not the sort of Budget we would want to repeat…[this budget] is needed to wipe the slate clean and to put our public finances on a firm trajectory.”
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