Theresa May needs to spread the jam more thickly


Since taking office in July, Theresa May has made it clear that she wants to put the ‘just about managing’ – those working families struggling to get by – at the heart of her government’s agenda. Yet Wednesday’s Autumn Statement, which provided the first opportunity for setting out a package of support, proved less jam-packed with goodies and more of a jammy dodger.

Inevitably the headlines were grabbed by the OBR’s assessment of what Brexit means for the economic outlook over the rest of this decade. With the price tag coming in at a sizeable £59 billion of additional borrowing over the parliament, such attention is understandable. Add a further £26 billion in non-Brexit related forecast changes (mainly driven by the fact that UK growth is proving less tax-rich than the OBR has previously assumed) and £12 billion of technical classification changes into the mix and the overall scale of the public finance deterioration facing the new Chancellor rose to £96 billion.

Crucially for households, Philip Hammond obeyed the first rule of policy making and avoided making things worse by attempting to stick to his predecessor’s deficit reduction targets. With the economy entering very uncertain times, now isn’t the right time for further spending cuts or tax rises.

Indeed, the Chancellor’s package included elements of new spending – with an investment boost in particular catching the eye – lifting the extra borrowing required over the parliament relative to the outlook at the time of the March Budget to a total of £122 billion.

And there were clearly some policies designed to help those on low to middle incomes. While not a new policy, the confirmation of a 4 per cent increase in the National Living Wage from next April represents a £600 increase in earnings for full-time minimum wage workers aged 25 and over.

Given the increasing drag on living standards provided by rising housing costs in recent years, the announcement of a further £1.4 billion to support house building was also welcome. So too was the decision to ban letting agency fees for prospective tenants, potentially helping the significant and growing share  of just managing families living in the private rented sector. Another freeze in fuel duty will also be welcomed by many just managing families, though gains will be spread across the income distribution.

By far the most targeted support offered came in the form of a reduction in the rate at which recipients of Universal Credit have their awards reduced as they earn more. Once above a specified threshold, non-taxpayers faced losing 65p of each additional pound earned in the form of lower benefit receipt. Following Wednesday’s announcement, this ‘taper’ rate will be reduced to 63p in the pound.

Alongside boosting incomes, this move is designed to raise incentives for working and earning more and it definitely represents a step in the right direction. But in truth it is pretty small beer, especially when set against the £12 billion of working-age welfare cuts already biting in this parliament. Indeed, the cumulative cost of this giveaway is set to reach just £1.2 billion by 2019-20. That’s less than half the additional ‘windfall’ savings the government is expected to enjoy thanks to unexpectedly high inflation strengthening the bite of the pre-existing working-age benefits freeze.

Overall, the Chancellor reversed just 7 per cent of inherited tax and benefit-related cuts to incomes among the poorest half of households. The upshot is that working families in receipt of Universal Credit are set to be made £1,200 a year worse off in 2020 as a result of policy changes – even after accounting for gains associated with the National Living Wage, income tax cuts and additional hours of free childcare.

These figures matter all the more because the same economic revisions that have damaged the public finances are also expected to harm household finances. Average earnings are projected to be £830 lower in 2020 than was previously thought; a product of both lower than expected pay rises and higher than anticipated inflation. That will leave average wages no higher than in 2006 and will mark the present decade as the worst for earnings growth since the first decade of the last century.

In combination, the economic and policy backdrop is set to lead to falling incomes across the poorest third of households over the rest of the decade. And the outlook appears tough for better-off families too, with roughly three-quarters of households projected to record lower levels of income growth in this parliament than they did in the last.

Alongside delivering Brexit and dealing with the public finance hit implied by the darkening of the economic outlook, Theresa May’s government is likely to find itself defined by its ability to rise to the challenge of a fresh potential squeeze on household finances in the coming years. It failed to deliver enough this week, but it will have further opportunities to turn its rhetoric on the just managing into reality over the coming months and years. It’s vital that it provides more jam tomorrow.

This article originally appeared in The Times Brexit Briefing