A Government reset focused on living standards should ruthlessly prioritise growth, work, and young people’s prospects

The Government needs to reset its economic agenda against a bleak backdrop of weak growth, falling living standards, and high borrowing costs. This will require honesty about the scale of Britain’s problems, but a better outlook for living standards can be achieved with a ruthless prioritisation of growth, work and young people’s prospects, according to new Resolution Foundation research published today (Thursday).

With the Prime Minister’s supporters and detractors both agreeing that the Government needs a reset after its election drubbing, the report sets out how the Government can prioritise delivering on its core promise to boost growth and raise living standards.

The bleak backdrop to the reset is an economy that is forecast to grow at a slower rate over the next five years than it did during the sclerotic 2010s, and war in the Middle East dealing a fresh curve ball to economic recovery.

The Foundation’s updated living standards outlook, which uses the Bank of England’s latest short-term inflation forecasts, shows the war is set to cause a £550 hit to the typical working age household this year – enough to turn income growth of 1.2 per cent into a fall of 0.5 per cent.

While some politicians want to respond to this shock with expensive universal support for energy bills or crowd-pleasing tax cuts, the Foundation warns that the perilous state of the public finances should rule out such a wasteful approach.

Its analysis of the Bank of England’s middle scenario shows that the impact of the war could increase borrowing by £16 billion by 2029-30. To her credit, the Chancellor has put in place sufficient headroom (£24 billion) to withstand this shock, comparable to that faced immediately after the Brexit referendum. But the harsh reality facing an unpopular government is there is no loose change to help turn their fortunes around.

The Government’s reset should double down on growth and focus on those who have borne the brunt of long-term economic stagnation: young people and working families. Their needs should be prioritised over advantaged wealthier households, who have benefitted from Britain’s 40-year wealth boom and a state that is increasingly dominated by delivering healthcare and pensions.

Having increased departmental spending in 2029-30 by £84 billion and taxes by £70 billion since coming into office, the Government should focus on better, rather than extra, spending and taxation.

A bolder growth agenda should reverse some of the worst economic damage from Brexit. EU alignment should be extended beyond food standards to chemicals and pharmaceuticals, while a truly pro-growth approach would pursue a single market for goods trade, as has already been secured for Northern Ireland.

More homes need to be built in major cities – boosting growth and creating more opportunities for young people to find new jobs and get on the housing ladder. This requires going further and faster on addressing the blockers to housebuilding, with an expanded role for the public sector. A new targeted equity loan scheme could help up to a million first-time buyers onto the housing ladder.

Growth should be the focus of further tax reform too, including reducing residential Stamp Duty and reforming Council Tax. Tax measures which remove distortions can raise revenue and boost growth at the same time, such as cutting the VAT registration threshold. Reducing employee National Insurance while raising Income Tax would reduce the tax gap that penalises income from work over other forms of income.

With the poorest working-age families seeing their incomes fall by £1,800 per year since 2021-22, the Government needs to think how the benefit system can be improved in tight fiscal circumstances.

Low-income renters are being squeezed by the near-record wedge between frozen housing support and the cost of rising rents. Closing this gap could be funded by a small increase to the Universal Credit taper. Finally, the Government should call time on the Triple Lock, with its end date determined by when the state pension reaches a target level relative to average earnings.

Ruth Curtice, Chief Executive of the Resolution Foundation, said:

“The Government’s appetite for a reset is being driven by terrible election results. But the backdrop of weak growth, and the war in Iran delivering both a £550 blow to family finances and a £16 billion hit to the public finances means it is in everyone’s interest for the country to change economic gear.

“The Government must ruthlessly prioritise what really matters – doubling down on growth and focusing on those who have lost out from economic stagnation such as young people and working families.

“This prioritisation is not easy. There is no plausible route to growth in Britain today that doesn’t include sounder public finances, and taking on those who oppose more trade with Europe or more homes in their backyards.

“The Government has ducked those fights and still taken a beating at the ballot box. Now is the time to truly put stronger growth and rising living standards first.”