Households are expected to see a minimal increase in their disposable income in the upcoming years, according to a prominent think tank. The Institute for Fiscal Studies (IFS) has projected that average disposable incomes will only grow by 0.5% annually during this parliamentary term, a stark contrast to the more than 2% growth achieved in previous parliaments from the mid-1980s to the mid-2000s, as highlighted by Helen Miller, the director of the IFS.
The IFS criticized Chancellor Rachel Reeves’ Budget as “underwhelming,” emphasizing that spending will be front-loaded in the next three years, leading to increased borrowing. Subsequently, there will be a need for significant tax hikes to establish a forecasted £22 billion cushion to handle potential future economic shocks.
While the IFS acknowledged positive aspects of the Budget, such as the expansion of “headroom” and a proposed £7 billion tax on electric cars, it also raised concerns about Labour’s ability to adhere to its spending plans before the next general election. Ms. Miller expressed skepticism about Labour’s fiscal strategy, characterizing it as reliant on optimistic spending plans and delayed tax increases. She questioned the feasibility of the government delivering on its ambitious plans.
Furthermore, the IFS pointed out that Labour’s decision to prolong the freeze on the income tax threshold until 2031 contradicted the party’s manifesto commitments. Although this freeze is crucial to Labour’s strategy to address the public finance deficit, it will result in higher tax payments for many individuals.
In response to criticism, PM Keir Starmer defended Labour’s adherence to its pre-election promises, stating that everyone must contribute to address the financial challenges. The IFS analysis confirmed earlier predictions that this parliament would witness the largest tax increases in history.
Additionally, the IFS highlighted that the majority of those affected by the new “mansion tax” on properties exceeding £2 million would be in London and the South East, with a significant concentration in specific London boroughs. The IFS cautioned that the benefits of an energy bill reduction announced in the Budget would be short-lived, estimating an average saving of £131, diminishing to just £39 by 2029/30.
Criticism was also directed at successive governments for failing to undertake a comprehensive overhaul of the UK’s tax system, with the IFS describing the proposed solutions as temporary fixes addressing symptoms rather than underlying issues.