The biggest wage squeeze in British economic history will leave the average worker almost £13,000 a year worse off by the middle of the 2020s, Rishi Sunak has been warned.
The Institute for Fiscal Studies (IFS), the UK’s leading tax and spending thinktank, said an unprecedented two-decade hit to earnings would leave average household disposable income 42% lower than it would have been had wages grown at pre-2008 financial crisis rates.
The 2010s were the weakest decade for real wage growth since the Napoleonic wars, but the IFS said the stagnation was expected to continue. By 2026, it said average household earnings would be £30,800, compared with £43,700 if wages had risen at the same pace as in the two decades before the banking crisis.
Paul Johnson, the IFS director, said the real-terms damage to household incomes was unprecedented in modern history, with weaker economic growth and higher inflation to blame.
“The gap between what we might have expected on the basis of pre-financial crisis trends and what is actually happening is staggering,” he said.
At the budget on Wednesday, the chancellor moved to partly reverse cuts to universal credit benefits in response to mounting concerns over the squeeze on low-income workers this winter.
Disruption linked to the pandemic and Covid has pushed up inflation to the second-highest level in a decade in recent months, with expectations that the barometer for the cost of living will rise further this winter.
However, the IFS said Sunak announcing £40bn of tax increases this year – the largest since any budget since 1993 – amid high levels of inflation would cause “real pain” for low-income households.
Issuing its verdict after the chancellor’s budget, it said voters may not get much feelgood factor despite Sunak’s speech pledging a “new age of optimism” as the country emerges from the emergency phase of the pandemic.
“Over the next several years a combination of tax increases and high inflation will mean very slow growth in living standards,” Johnson said.
“High inflation, rising taxes and poor growth, still undermined more by Brexit than by the pandemic, will see real living standards barely rising and, for many, falling over the next year.”
A spokesperson for the Treasury said the chancellor’s decisions would boost the incomes of the poorest people in Britain, and that higher taxes would mostly impact middle- to higher-income households.
“This government’s decisions have been worth nearly £500 per year extra to households on average, and more than £1,000 for the poorest households – and that’s before factoring in wage growth, including the rise in the national living wage.”