British households will remain worse off than before the pandemic until 2023 as rising inflation hits living standards, the Treasury’s economics watchdog has warned as Rishi Sunak sought to defend his budget.
Charlie Bean, a former Bank of England deputy governor and board member of the Office for Budget Responsibility, said that growth in household incomes, after taking account of inflation, would effectively stall over the next two years.
Answering questions from MPs on the Treasury committee on Tuesday, he said: “We don’t have real household disposable income getting above pre-pandemic levels until the back end of 2023, and it’s growing at a pretty mediocre rate from then on.”
The OBR issued forecasts alongside last week’s budget showing that inflation would weigh down household incomes over the next two years, before rising by just 1.3% a year on average by the middle of the decade.
Sunak later told the MPs on the committee that he was taking action to protect low-paid workers amid the living standards squeeze. However, he admitted it would take time to have an impact on real-terms wages.
“Is it going to happen overnight? Of course these things don’t happen overnight. But we’re putting in place all the things that are required for there to be better wage increases for people over time,” he said.
The chancellor said raising the national living wage, cutting the universal credit taper rate, and investing in training and education schemes and other public services would help those on low incomes. He also said his “goal, my mission” was to bring down tax from the highest levels since the 1950s.
“For those on the lowest incomes for whom these things make the most difference, actually next year – because of the increase in the national living wage, [and] if they’re on universal credit, they’ll benefit from the taper rate – they’ll have significantly more cash in their pockets.”
Last week the Institute for Fiscal Studies warned that Britain was set for the worst wage squeeze in modern history, with the average worker on course to be £13,000 a year worse off by the middle 2020s than they would have been if wages had risen at pre-2008 financial crisis rates.
Despite the unprecedented squeeze, Sunak insisted that breaking two Conservative manifesto pledges – raising national insurance and pausing the pensions triple lock – was justified.
“I genuinely believe it was the right and fair thing to do,” he told MPs, saying that high levels of government borrowing and debt incurred during the pandemic needed tackling to provide “fiscal space” to protect against future shocks.
Pointing out that pensions were at the highest level relative to earnings from work in the past 30 years, he said applying the triple lock would have meant finding “billions of pounds” in savings elsewhere. “I didn’t think that was fair,” he said.
The state pension will rise by 3.1% from next April, rather than by more than 8% if they had risen in-line with average earnings before that element of the triple lock was suspended.
Sunak also defended cutting a surcharge on banking industry profits, a step that will cost the exchequer as much as £4bn over five years. He argued banks would still pay more tax because corporation tax was rising from 19% to 25% by 2023.
The banking industry corporation tax surcharge is reducing from 8% to 3%. This means the combined tax rate for banks will rise from 27% to 28%, although it could have risen as high as 33% if the surcharge was maintained.
