Households face ‘dismal’ rise in spending power, says IFS

Households are facing a “really disappointing” rise in living standards after the Budget, the head of an influential think tank has warned as he accused Labor of breaking its manifesto promise.

According to the government’s official forecaster, average disposable income – a measure of people’s earnings after tax – will rise by just 0.5% in each of the next five years.

IFS boss Helen Miller said she considered the increase in National Insurance to be a breach of her pledge not to raise taxes on working people due to the cap on salary sacrifice pension payments and freezing the tax threshold.

The Prime Minister told the BBC that the Labor Party “made a number of commitments in our manifesto, which we have delivered”.

According to the IFS, under current inflation forecasts, average disposable income per person is expected to rise by about £104 a year over the next four years.

“Ahead of this Budget, the UK faced weak economic growth, stagnant living standards and a range of fiscal pressures,” Ms Miller said.

“The same is true after this budget.”

Ms Miller said growth in disposable income – which measures the amount of money people have left to spend after paying taxes – was disappointing “especially when we had achieved growth of more than 2% per year in each parliament from the mid-1980s to the mid-2000s”.

His comments were supported by the Resolution Foundation think tank, which predicted that the rise in living standards in this parliament would be the second worst on record.

Before last year’s general election, Labor promised not to increase taxes on “working people”, including National Insurance, income tax and VAT.

The Prime Minister acknowledged that he was “asking everyone to contribute”, which he called “fair and necessary”.

“I absolutely wanted to endure and keep the cost of living down because for most… that’s going to be the most important thing.”

Reeves also denied that the budget broke manifesto promises but acknowledged that his policies would have an “impact on working people”.

He told the BBC that this contribution has been kept to a “minimum” due to other changes, such as increased taxes on online gambling, assets worth more than £2 million and income from dividends or renting out property.

In her Budget, Chancellor Rachel Reeves decided to extend the freeze on income tax thresholds for a further three years beyond 2028. They also imposed a £2,000 a year cap on the amount that can be put into pensions from 2029 through salary sacrifice arrangements before National Insurance payments are due.

The Chancellor also highlighted other measures aimed at cutting the cost of living, including freezing NHS prescription charges and deregulated rail fares in England, as well as scrapping the green levy added to energy bills.

Asked whether she would apologize for breaking her promise not to raise taxes on working people, Reeves said she had made “reasonable and necessary choices” to cut NHS waiting lists, lift children out of poverty and reduce the cost of living.

Ahead of the budget, there was much speculation about the outlook for UK finances and the economy, and how the Chancellor faced large gaps in meeting his fiscal rules on borrowing, causing uncertainty in financial markets.

Giving her analysis of the budget, Ms Miller noted how the OBR’s “overall forecast downgrade was minimal” and there was “no major fiscal repair work” to do.

In an interview with the BBC, he also said that the government appeared to have ignored its stated number one mission of promoting economic growth.

He said, “We should not expect that every budget will solve all our problems, but I think it is reasonable to expect that a government which considers development as its number one mission will do more to accelerate growth.”

Ms Miller said Reeves could reform the tax system to boost the economy and the government also had “hard efforts” to make in areas such as competition policy, regulation and education.