Yesterday’s discussion of the Chancellor’s first (and last) Autumn Statement understandably focused on the very significant increase in borrowing that the first official take on the economic impact of the decision to leave the EU unveiled.
In short the Office for Budget Responsibility thinks the Brexit vote is expensive – coming with a price tag of an extra £59bn of borrowing between now and 2020-21. Crucially the government’s answer to that fact was not only to simply pay up (rather than engaging in any new fiscal tightening), but to increase it by a further £26bn. Alongside a wider deterioration in our ability to bring in tax revenue, the Brexit impact and the Chancellor’s decision to borrow even more takes the total extra borrowing to £122 billion by 2020-21.
To put the scale of this deterioration into context it is worth noting that, for all the deep cuts to public services and welfare happening over the course of this Parliament public sector net debt as a proportion of GDP is forecast to actually end this Parliament at a higher level than it started.
The effect of this major increase in borrowing is to make redundant all of the fiscal rules the Chancellor inherited from his predecessor. The Chancellor has not only chosen to replace the rules with significantly looser alternatives (to achieve 2 per cent structural borrowing and falling debt in 2020-21, rather than an absolute surplus in that year) but to change the role of fiscal rules full stop.
Where George Osborne and Gordon Brown used fiscal rules as an anchor for their fiscal policy, Phillip Hammond is instead using them as a worst case scenario ceiling. Indeed, there is so much leeway between his announced fiscal stance and rules that even if another fiscal hit of the order of Brexit were to occur they would still not be breached.
Looking at the actual fiscal policy adopted, rather than the rule announced, it looks much more like the Chancellor is aiming to run a small current budget surplus rather than meet the announced fiscal rules, a policy similar to that adopted by the Coalition government before 2015 and advocated by several parties in the run up to the last general election.
These are big changes for the public finances, but just as big are the impacts on family finances. Looking ahead on the basis of the OBR’s new forecasts and the government’s policy decisions, the picture for living standards is if anything more concerning. The earnings people bring home from work are obviously affected by the same economic changes that have undermined the public finances. Average earnings are now forecast to be £830 a year lower than expected in 2020, with this decade now set to be the weakest one for wage growth since the 1900s. Growth of just 1.6 per cent between 2010 and 2020 compares with an increase of 12.7 per cent in the 2000s and over 20 per cent in every other decade since the 1920s.
Family incomes are made up of more than what happens in the labour market – tax, benefits and other policy measures are also key. In recent months it looked like the government recognised that they had inherited welfare cuts that would mean significant income falls for the very just managing families that Theresa May has rightly highlighted as deserving support. Indeed the Autumn Statement did include some welcome measures to raise the minimum wage, tackle letting agent fees and reduce the taper rate at which benefits are taken away as families earn more.
But overall the rhetorical commitment to just managing families has not been delivered upon. The giveaway from that reduced taper being wiped out more than twice over by the additional takeaway from higher inflation deepening the impact of the freeze on benefits over the next few years. When set against all other policy changes announced since the 2015 election, the Autumn Statement only undoes 7 per cent of the hit from benefit cuts to the bottom half of the income distribution.
Taking all this together we can look at the outlook for family incomes in the coming years, and it paints a grim picture. Our new income forecast brings together lower earnings growth, higher inflation, and tax/benefit changes. It shows that overall, the rest of this parliament looks set to see the return of the income squeeze we thought we had left behind in the last parliament. Indeed households look set to see income growth averaging less than half the already very weak increases of 0.5 per cent a year that were recorded between 2010-11 and 2014-15.
Crucially, while top earners were hit the hardest following the financial crisis, looking forward the biggest losers are lower income families, with the entire bottom third of the income distribution set to see incomes fall in the years ahead.
Everybody, whatever their political persuasion or indeed view on Brexit, will agree that the return of an income squeeze on this scale is hugely unwelcome. In the months and years ahead the key task facing the government, and indeed all of us, is to work to ensure these forecasts do not turn out to be the history that Britain’s families, be they just managing or otherwise, have had to live through.
This post originally appeared on the Huffington Post