Family finances hit by biggest ever productivity growth downgrade

Published on Public Finances and the Economy

Chancellor makes housing a welcome centrepiece of his Budget

The Chancellor has delivered the first post-election giveaway Budget this century despite a grim outlook for the economy and public finances, driven by the Office for Budget Responsibility’s biggest ever productivity downgrade. That downgrade has huge implications for family finances over the remainder of the parliament, the Resolution Foundation said today (Wednesday) in response to the Budget.

Facing a tough set of economic forecasts, the Chancellor has responded by announcing the only post-election giveaway Budget since the millennium, making policy choices to borrow a further £14bn more over the next five years. But while the public finances are disappointing, the Chancellor has more room for manoeuvre than many expected. The reduction in headroom against his main fiscal target in 2020-21 from £26bn to £14.8bn means that Philip Hammond retains roughly the same headroom against his fiscal rule as Chancellors have had on average since 2010.

The outlook for family finances has if anything deteriorated more markedly. Resolution Foundation analysis finds that disposable incomes are now expected to be £540 lower by 2023 than forecast in March, largely as a result of weaker pay growth. Annual pay has been lowered by around £1,000. As a result, pay is not set to return to its 2008 peak until the middle of the next decade, with Britain now facing a 17-year pay downturn.

Recognising the scale of the intergenerational challenge facing Britain, the Chancellor’s Budget set out a welcome focus on housing with a wide range of measures.

The single biggest measure announced is a £3.2bn stamp duty cut that will help some first time buyers but raise house prices. New capital spending for the Housing Infrastructure Fund this spending review is limited to £900m, with further funding coming from within future capital budgets. Meeting the ambitious target for building 300,000 homes a year will require a bigger direct role for the state in making construction happen.

On social security the Chancellor has failed to take sufficient action to alleviate the current living standards crunch. Scrapping the seven day wait in Universal Credit, making advances easier to claim and avoiding gaps in housing support is welcome. But major cuts totalling £14bn are still going ahead in the coming years, posing major problems for low-income families.

Torsten Bell, Director of the Resolution Foundation, said:

“The Chancellor has been handed a massive downgrade to expectations for how fast Britain’s economy can grow – knocking a full quarter off the growth we can expect over the next five years.

“While the result for the public finances is grim, the Chancellor has chosen to take the extra borrowing on the chin and indeed to borrow more, including welcome new action on housing.

“The outlook for family finances however is worse. Our incomes are expected to be £540 lower than previously thought and pay is not set to return to pre-crisis levels until the middle of the next decade.

“The Chancellor has made the wrong call to press ahead with a damaging freeze on benefits. Welcome moves to reduce the waiting time for Universal Credit are also not matched by dealing with the much bigger challenge of planned cuts to the new benefit.”

On the public finances

  • The OBR has revised down productivity growth by one third over the next five years – its biggest ever downgrade.
  • Borrowing is set to increase by an extra £29bn between 2016-17 and 2021-22, compared to the March 2017 forecast.
  • The Chancellor’s reduced £14.8bn fiscal headroom is broadly in line with the average headroom since 2010 (£17.4bn).

Matt Whittaker, Chief Economist at the Resolution Foundation, said:

“Faced with the biggest ever productivity downgrade and the GDP outlook being cut by a quarter, the Chancellor has sensibly reduced his fiscal headroom and allowed borrowing to rise by £29bn over the next five years.

“By doing this he has been able to announce a rare post-Election giveaway Budget, albeit with few big ticket giveaways and takeaways.”

On housing

  • The Housing Infrastructure Fund has increased by £925m to 2020/21, with around £2bn of spending in 2021/22 and 2022/23 to come from future capital budgets.
  • The stamp duty exemption for first time buyers will cut bills by up to £5,000. But it is expected to raise house prices by 0.3 per cent and only lead to an additional 3,500 first time buyers.

Lindsay Judge, Senior Policy Analyst at the Resolution Foundation, said:

“The Chancellor was right to make housing the centrepiece of his Budget. He has shown welcome ambition in measures to boost housing supply.

“Big questions remain however over how much this will reduce housing costs given that the single biggest measure announced – the stamp duty exemption for first-time buyers – is expected to feed through into higher house prices.”

On tax and welfare

  • The government has taken welcome action to reduce the 6-week wait by ending the 7-day waiting period for new UC claims and allowing a two week roll-on of housing benefit.
  • But it has missed an opportunity to reboot UC. The £1.5bn spent on supporting the UC roll-out is less than the amount spent on freezing alcohol duties.

David Finch, Senior Policy Analyst at the Resolution Foundation, said: “It is good to see the government has reduced the six week wait for UC payments by removing the 7 waiting days, and rolling on housing benefit for 2 weeks should help reduce arrears building up.

“But this is just one of many problems that will affect families on UC over the coming months and years. The government has missed a huge opportunity to reboot Universal Credit, rather than continue a rollout that will leave millions of families thousands of pounds worse off.”