Public and family finances squeezes extended well into the 2020s by grim Budget forecasts

Published on Public Finances and the Economy

Britain is on course for an unprecedented 15 years of spending cuts and lost pay growth, according to the Resolution Foundation’s overnight analysis of Budget 2017.

The report finds that despite the Budget day focus on short term forecast improvements, the date for achieving an overall budget surplus has been pushed back until 2025. Average earnings are now only set to return to their pre-crisis level by the middle of the next parliament.

On the family finances, the analysis finds that:

  • Real average earnings are only set to return to their pre-crisis peak (2007) by the end of 2022 – 15 years on.
  • This is set to be the worst decade for pay growth for 210 years, with lost pay growth of £12,000 by 2020.
  • Following a brief mini recovery, real average income growth is set to fall to 0.2 per cent by 2020 – lower than any pre-crisis period.
  • The combination of pay stagnation and rising inequality driven by benefit cuts means that this parliament (2016-17 to 2020-21) is on course to be worse for the poorest third of households than the four years following the financial crisis (2007-08 to 2011-12).

Looking at the public finances, the analysis finds that:

  • The UK is only on course to meet the Chancellor’s ultimate fiscal objective of eliminating the deficit in 2025 – a full 15 years after George Osborne began to cut spending and raise taxes.
  • The grim long term picture comes despite borrowing being revised down by £16.4 billion this year (2016-17) – the biggest single revision to an in-year borrowing forecast since the OBR was created.

The analysis also looks at the deterioration in the OBR outlook for pay and prices since the March 2016 Budget and finds that:

  • A single person working full-time on the minimum wage – earning £13,150 – will be £380 worse off by 2020.
  • A dual-earning couple with two kids and combined earnings of £29,020 will be £360 a year worse off by 2020.

It adds that there has been little policy action in the last two fiscal events to boost incomes, and that the Chancellor should revisit support for lower income households in future Budgets.

Torsten Bell, Director of the Resolution Foundation, said:

“Spring Budget 2017 offered the Office for Budget Responsibility and the Chancellor the chance to respond to better than expected economic news in recent months, following grim forecasts about the outlook for Brexit Britain back in November’s Autumn Statement. Both have largely ignored it.

“The big picture from yesterday’s Budget is that the big squeezes on both the public and family finances have been prolonged well into the 2020s.

“On the public finances, the focus on good news this year has hidden the fact that the OBR has stuck to its pessimistic guns from the Autumn Statement about the fate of Brexit Britain’s economy. The weak medium term outlook for borrowing means we’re still only halfway through the fiscal consolidation that was supposed to have finished by now.

“And while the OBR at least delivered some good news on borrowing, the family finances picture has actually deteriorated since the Autumn. Britain is set for a return to falling real pay later this year, with this decade now set to be the worst for pay growth since the Napoleonic wars.

“Some households will feel the pinch more than others. The combination of weak pay growth and over £12bn of benefit cuts means that for the poorest third of households this parliament is actually set to be worse than the years following the financial crisis.

“Of course, the OBR forecasts can and should change. Tackling the living standards squeeze facing low and middle income households should be a priority for future Budgets.”