May 23, 2024

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Britons face the biggest drop in living standards ever as the government tightens its belt

Britons face the biggest drop in living standards ever as the government tightens its belt

Prime Minister Rishi Sunak (centre), along with Chancellor of the Exchequer Jeremy Hunt (center right) hold their first cabinet meeting on October 26, 2022 in London, England.

WPA Pool | Getty Images

London – Bassem The UK government has announced a £55 billion ($65.5 billion) program to raise taxes and cut spendingthe country is facing the sharpest drop in living standards since records began.

along with Confirmation that the country entered a recession Gross domestic product will contract by 1.4% in 2023, and the independent Office for Budgetary Responsibility (OBR) estimated Thursday that real household income — a measure of living standards — is expected to decline by 4.3% in 2022-23.

This would be the largest drop in a single year since the Office for National Statistics (ONS) began recording in 1956-57, and would be followed by the second largest drop of 2.8% the following year.

A cumulative decline of 7.1% between 2021, 2023 and 2024 would drop the HDI to its lowest point since 2013-2014, erasing eight years of growth. Average household income per capita is only expected to regain its 2018-2019 level in 2027-28.

Unemployment is also expected to rise by 505,000 from 3.5% to peak at 4.9% in the third quarter of 2024.

The balance sheet office said the near-term declines would have been worse had it not been for the government’s significant fiscal support this year in the form of an energy price guarantee and successive tranches of cost-of-living payments to low-income households.

Nominal wage growth increased in 2022 and is expected to remain high in 2023, but it was not enough to prevent a significant decline in real wages causing historical pressure on household income. The Office of the Balance Sheet expected real wages to fall 1.8% in 2022 and 2.2% in 2023 before recovering to grow at 1.3% annually thereafter.

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In Thursday’s autumn statement, Finance Minister Jeremy Hunt announced £30bn of spending cuts and £25bn in tax increases, while raising the government’s cap on household energy bills under the Energy Price Guarantee Scheme by £500 a year.

The measures included a further two-year freeze on income tax limits and a reduction of the top income tax rate to £125,140, ​​along with unexpected tax increases on energy companies’ profits.

The Resolution Foundation – a think tank focused on improving the living standards of low- and middle-income earners – said in a report on Friday that Hunt’s actions added pressure on the “embattled centre”, with personal tax hikes announced during the next parliamentary session. This period is expected to generate a steady income of 3.7% for typical families.

“The Office of the Balance Sheet’s weaker forecast for wages means that real wages are now not expected to return to their 2008 level until 2027. If wages had instead continued to grow at the pre-crisis rate during this unprecedented 19-year wage decline, they would £292 a week – or £15,000 a year – top”, reads the Resolution Foundation report.

Research director James Smith said Hunt was essentially faced with the choice of deciding how Britain, as an energy importer during the energy price shock, would become poorer.

“He determined that families would do so with higher energy bills, higher taxes, and worse public services than previously expected. Whether or not making choices is difficult, so will the reality of living through the next few years,” Smith said.

An economist at Barclays Bank talks about how the UK government's debt is on a downward trajectory

Hunt announced targeted financial support for low-income or benefits-finance-tested pensioners and retirees, while pensions and benefits would rise in line with September’s annual inflation level of 10.1%, an £11 billion spending commitment. These measures are expected to limit the depth of the recession.

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“Continued financial support to households throughout 2023 provides support for our assessment that the recession is likely to be less shallow than currently projected by the Bank of England and the Office for Budget Responsibility,” said Raj Badiani, chief economist at S&P Global Market Intelligence. .

“Our main concern is that government tax calculations rely too heavily on sudden higher taxes on the profits of oil and gas companies, which are expected to raise £14 billion in 2023. History suggests that unexpected tax receipts are often disappointing, making It points to persistent risks from fiscal vulnerabilities and an unexpected rise in government borrowing.”

Many of the deepest spending cuts have been carried forward beyond April 2025, which the Institute for Fiscal Studies said is “probably the right choice” given the potential economic and social costs of “unnecessarily large fiscal tightening in advance” and the “deep uncertainty” baked in. look.

“But delaying all difficult decisions until after the next general election casts doubt on the credibility of these plans,” said Paul Johnson, director of the IFS.

“Tight post-2025 spending plans, in particular, may add to credulity.”

Johnson said the chancellor hoped his demonstrated commitment to fiscal responsibility and independence of the Bank of England, combined with OBR involvement and his “less hawkish approach to economic policymaking” would be enough to “restore the UK”. A shattered international reputation.”