Tough news for living standards from the OBR

Yesterday’s budget had been pre-billed as a boost to living standards, and in particular as targeting the ‘squeezed middle’. Of course, for most in the group this was always going to be small beer in comparison to the impacts from last year’s Spending Review and emergency budget. But overall, did yesterday bring good or bad news for low-to-middle earners?

Much of the bad news for the group came from the Chancellor’s failure to offer any relief to those about to be a hit by a multi-billion pound grab on tax credits. One of the biggest worries is that the Government didn’t change course on plans to cut childcare support which will see half a million working parents lose £440 from April. Our recent survey with Netmums says one in five working mothers affected may have to give up work. It’s the kind of cut you’d only want to make in the most desperate of circumstances, and it looks even stranger now that the Chancellor has found £1bn for a £48 tax-cut to everyone in Britain earning between £8,000 and £100,000.

That said, as inefficient as it is, the personal allowance move does bring some good news. In the grand scheme of things, it’s hard to see it as more than incremental – under normal circumstances, the personal allowance would have risen in line with inflation to £7,864 anyway, so the new increase only adds £241 to what was expected. But as many members of the public said in interviews last night, at the moment, every little helps.

The same is true of cuts to fuel duty. Tuesday’s inflation figures had given a timely reminder of the price pressures now hitting family budgets, and with inflation now hitting lower-earning households the hardest, the Chancellor was right to focus on relieving the key pressure of transport costs, a particular worry for families in work, but on low incomes.

But the really bad news for living standards yesterday didn’t come from the Chancellor; it came from the OBR. Its revised projections for wages and inflation confirm that the squeeze on living standards is about to get a whole lot worse. As the charts below show, the OBR’s revisions since their November 2010 projections are striking and almost uniformly negative. Wages are set to rise much more slowly than previously thought. Inflation is set to be much higher, all the way through to 2015.

These figures put things into stark perspective when you consider that a 1 percent decline in real wages hurts the average worker by around £250. This year, average wage-growth is now forecast to be 2.0 percent and RPI inflation 5.1 percent – in other words, inflation is set to outpace wages by more than 3 percent. As the below chart shows, that’s a much worse scenario for living standards than was envisaged in November.