Budget 2023: UK faces ‘disastrous decade’ for living standards as households set to be £4,200 poorer

Economy in ‘deep funk’, warns think tank – attacking Jeremy Hunt’s ‘wasteful’ pensions tax break

Britain faces a “disastrous decade” for living standards and high taxes following changes made in Jeremy Hunt’s Budget, a leading economic think tank has warned.

The Resolution Foundation said typical household disposable incomes on track to remain lower by the end of the 2027-28 than they were before the Covid crisis.

The think tank also taxes as a share of GDP are on track to hit a 70-year high of 37.7 per cent by then – equivalent to nearly an extra £4,200 for every household in the UK.

The UK is investing too little and growing too slowly while living standards stagnate, said the foundation, added that Britain’s economy remains in a “deep funk”.

The experts’ Budget report also criticised Mr Hunt’s “hugely wasteful” £1bn pensions tax break to discourage an estimated 15,000 earners from retiring, saying it would cost £80,000 per extra worker.

It said the employment gains may be “overstated” and could even backfire, since giving “very large wealth boosts” could even encourage some people to retire earlier.

The Institute for Fiscal Studies (IFS) estimated that pensions tax break would cost at £100,000 per job. “The lack of any coherent strategy here remains deeply disappointing,” said director Paul Johnson.

Torsten Bell, Resolution Foundation chief executive, said scrapping the pensions lifetime allowance was “hugely wasteful” – pointing out that the rich could pass it on to their children with no inheritance tax.

The foundation said someone with a £2m pension pot will receive a tax cut of almost £250,000. Labour has promised to reverse the £1bn pensions tax “giveaway for the wealthy” if it wins power at the general election expected in 2024.

Shadow chancellor Rachel Reeves said a Labour government would reinstate the lifetime pensions allowance and create a more targeted scheme just for doctors rather than allowing a “free-for-all for the wealthy few”.

Mr Hunt insisted he was “systematically” removing the barriers to work with his pensions changes – arguing that the pensions move could help to reduce the amount spent on locum and agency staff in the NHS.

Shadow chancellor Rachel Reeves with Labour leader Keir Starmer (PA)

But the chancellor admitted on BBC Radio 4’s Today programme that it was “impossible” to know exactly how many doctors would be encouraged to return to work or take on extra shifts because of his decision to ditch the lifetime pension allowance.

Tory MP Harriett Baldwin, chair of the Treasury select committee, said she was “very surprised” that the abolition of the cap on the lifetime pensions allowance had not been limited to doctors.

Pressure on the public services was largely ignored at Mr Hunt’s budget. Unprotected departments face 10 per cent cuts to real day-to-day spending per capita by 2027-28, rising to 14 per cent if defence spending targets are met over the next parliament.

“Britain’s economy remains stuck in a deep funk – with people supported into work but getting poorer, and paying more tax but seeing public services cut,” the Resolution Foundation report said.

Mr Bell said: “We are investing too little and growing too slowly. Our citizens’ living standards are stagnant. We ask them to pay higher taxes, while cutting public services.”

The Resolution Foundation welcomed what it called “much needed help for parents” with the biggest increase in childcare support on record set to encourage more parents to work.

The think tank’s analysis said, under the current system, a single parent of a one-year-old earning the National Living Wage would see their income fall after childcare costs by £370 if they moved from 25 to 35 hours of work a week.

Jeremy Hunt under pressure over pensions tax break ‘giveaway’ (PA Wire)

Under the new system, the same single parent would receive an income boost of £700. It said the richest fifth of households were set to gain £180 on average from the changes, compared to £130 for the middle fifth of households, and £20 for the bottom fifth.

The IFS said it is “highly uncertain” what impact Mr Hunt’s extension of free childcare will have on the labour market. The director said such a significant move would bring “risks” for the market if it was not properly funded.

Tory MP Miriam Cates criticised Mr Hunt’s childcare support package “is not the right policy” for women or children. “It doesn’t provide choice. Many mothers want to go back to work – but many mothers don’t.”

Meanwhile, trade unions complained of “betrayal budget” after Mr Hunt found £6bn to freeze fuel duty again while refusing to come up with additional cash for public sector workers seeking cost of living pay rises.

And several senior Tories demanding tax cuts spoke out against the corporation tax rise and freezing personal thresholds in line with cash rather than inflation. Jacob Rees-Mogg decried the government’s “not good” approach to tax policy.

Tory MPs urged him to cut taxes in the autumn budget later this year, rather than wait until too close to the election. Some are understood to be worried that waiting until 2024 will look too much like an election bribe.

Former Tory minister David Jones told The Independent: “I’d like to see corporation tax reduced as soon as possible. The Conservatives must be the party of low tax.”

Liz Truss loyalist Simon Clarke – a senior figure in the Conservative Growth Group advocating tax cuts – responded to the Budget by saying “we urgently need to have a more Conservative position on tax.”