Covid crisis prolongs Britain’s 15-year living standards squeeze and leaves austerity in place for many public services

The Covid crisis is on track to reduce average pay packets by £1,200 a year by 2025 compared to pre-pandemic forecasts and prolong Britain’s 15-year squeeze on household incomes, according to the Resolution Foundation’s overnight analysis published today (Thursday).

Here Today, Gone Tomorrow shows that the Covid crisis is causing immense damage to the public finances and permanent damage to household finances too.

The report notes that by the middle of the decade, average wages are now on track to be £1,200 lower than forecast pre-pandemic.

The combined effects of weaker pay growth and higher unemployment will serve to prolong Britain’s living standards squeeze. Household incomes are on course to grow by just 10 per cent in the 15 years since the start of the financial crisis in 2008, compared to the 40 per cent growth seen in the 15 years running up to the crisis.

That is the backdrop to the Chancellor declining to cancel plans that will see around six million households losing over £1,000 in reduced Universal Credit next April – just when unemployment is at its highest.

Other findings on public spending from the overnight analysis include:

  • Brexit boost for some Whitehall departments… Spending increases next year have gone to the usual priorities such as health, but also to departments taking on new responsibilities post-Brexit including HMRC (up 20 per cent in cash terms) and Defra (whose budget more than doubles over two years).
  • …but austerity looms for others. Looking further ahead, £13 billion of cuts to planned spending mean it will not feel like the end of austerity for many public services.  Unprotected departments day-to-day spending will remain almost a quarter smaller in real terms per person in 2024-25 compared 2009-10.
  • Hard-hat Britain. The Chancellor stuck to the ambitious capital spending targets set back in March. Public sector investment is still set to average 2.9 per cent of GDP over the next five years, the highest sustained level since the late-1970s.
  • Treasury takes back control of ‘levelling up’. The report warns that the highly centralised system of small grant funding means that the well-intentioned new Levelling Up Fund risks being bogged down in politics, rather than swiftly getting investment into communities.

There is no immediate pressure to set out plans for a fiscal consolidation, with the cost of servicing the Government’s debt next year set to be £20 billion less than previously expected. But once the recovery is secured, balancing the current budget by the end of the parliament will require around £27 billion of fiscal consolidation, or more if the Chancellor’s plan to avoid any permanent increase in spending post-pandemic proves impossible to stick to.

The bulk of consolidation will need to come from the tax rises that the Chancellor largely declined to mention this week, says the Foundation.

Torsten Bell, Chief Executive of the Resolution Foundation, said:

“The Covid crisis is causing immense damage to the public finances, and permanent damage to family finances too, with pay packets on track to be £1,200 a year lower than pre-pandemic expectations.

“The pandemic is just the latest of three ‘once in a lifetime’ economic shocks the UK experienced in a little over a decade, following the financial crisis and Brexit. The result is an unprecedented 15-year living standards squeeze.

“Yesterday, the Chancellor chose to ramp up his Covid spending to £335 billion. But he also quietly dialled down his spending plans beyond the crisis. For all the talk of ending austerity, its legacy will continue for many public services throughout the parliament.

“While the priority now is to support the economy, the permanent damage to the public finances mean taxes will rise in future. But which taxes those will be, like which Brexit we can expect, are questions the Chancellor left for another day.”