The outlook for living standards for middle-income earners is “weak” beyond this financial year, according to an annual report by a thinktank released ahead of the Labour government’s first budget.
The Resolution Foundation warned that a slowdown in pay growth across the board would start to bite by the time of Sir Keir Starmer’s first anniversary in office, arguing that the pace of salary increases would soon be overtaken by rising housing costs.
Its findings, released just weeks after Labour’s landslide election win, were based on forecasts by both the Bank of England and Office for Budget Responsibility.
It said that the impact would be felt most by the worse off – especially if the Treasury decides not to U-turn on planned Conservative cuts to benefits – as a greater proportion of their incomes is spent on things like rents and energy.
The foundation said that 400,000 more children risked coming under the poverty line over the parliament without intervention as the cost of living crisis pivots, in part due to interest rates remaining high to combat inflation.
A reason why rates are not coming down at a faster pace is due to wage growth being seen as an inflationary risk.
The Bank wants salary increases to ease while, ideally, the government does not because it exposes more people to financial difficulty.
It marks a worrisome challenge for the Labour administration because it comes at a time when it claims to have inherited a £22bn “black hole” in the public finances from the Conservatives.
The government blamed this void for its early decision to scrap winter fuel payments for the 10 million pensioners not in receipt of benefits.
Both Sir Keir and his chancellor Rachel Reeves have warned of further hard choices at the budget, due on 30 October, with the prime minister admitting earlier this week that tougher times lay ahead.
He stated those with the broadest shoulders would have to bear the brunt of the looming tax rises. The Tories have responded by arguing the budget will be a Halloween horror for the middle classes.
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PM: Budget will be ‘painful’
Labour has ruled out hikes to VAT, national insurance and Income tax.
The foundation’s Living Standards Outlook showed that incomes are expected to grow by 3% in 2024/25, but annual median income growth for non-pensioner households is forecast to tumble to 0.4% between 2024/25 and 2029/30.
This would leave annual average income growth over the whole parliament at 0.8% – or £1,400 per household.
The economists’ report suggested boosting real annual wage growth by one percentage point from 2025/26 onwards, to raise typical income growth for non-pensioner households to 8% by the end of the parliament – up from 5%.
It also said that scrapping the two-child limit on universal credit support and benefit cap, and raising the local housing allowance from 2025, could “lift 600,000 children out of poverty overnight” at a cost of £3.5bn.
The government has defied pressure from its own MPs for the two-child benefit cap to be dropped.
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Chancellor quizzed over tax rises
A third proposal was to uprate working-age benefits in line with wages rather than prices from 2025.
The study said that would cost around £9bn a year by the end of the parliament but “would stabilise child poverty rates at a lower level than in the previous parliament”.
Economist Alex Clegg said: “Britain is currently experiencing a mini living standards recovery as inflation falls but wage rises remain high.
“But this isn’t set to last, with the majority of income growth projected over the parliament coming in this year alone.”
He added: “While the outlook for middle-income households is weak, it’s even worse for poor households, with 400,000 children at risk of falling below the poverty line.
“This troubling outlook highlights the need for the new government to beat the forecasts that they have inherited.”
