How the autumn statement brought back the ‘squeezed middle’ | Economics

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Traditionally elections in Britain are decided by swing voters in a relatively small number of seats. Parties go to considerable lengths to tailor their policies to the perceived demands of those getting by on average incomes. Pollsters have even coined names for the archetypal electors that need to be wooed: Basildon man and Worcester woman.

So it will be of some concern to government strategists that the post-autumn statement analysis by thinktanks focused heavily on how the measures announced by Jeremy Hunt had an effect on those not particularly poor but not especially rich either. Both the Resolution Foundation and the Institute for Fiscal Studies highlighted the return of the “squeezed middle”.

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Clearly, life is not going to be easy for anybody in the next year or so. Britain has already had one lost decade of flatlining living standards since the global financial crisis and is now heading for another one. The IFS calculates that by the middle of the 2020s real household disposable income would be a third higher had the steadily rising pre-GFC trend continued.

But the IFS director, Paul Johnson, said it would be those on “middling” sorts of incomes who will feel the biggest hit from Hunt’s measures, because their taxes were rising, their wages were falling, and they wouldn’t benefit from the targeted support to those on mean-tested benefits. “Middle England is set for a shock,” Johnson predicted.

“Put all the tax and welfare changes together and this was a progressive fiscal statement – tax rises for the rich and increased targeting on the poor. It’s just that virtually all of us can expect to be worse off.”

The Resolution Foundation said the decision to use “stealthy” freezes in tax thresholds to raise money rather than increasing tax rates meant the overall impact was to squeeze those on middle incomes as well as higher-income households.

A typical household faced a permanent 3.7% income hit from the measures – the same as the top fifth of households – and bigger than the 3% income hit that the very top 20th of households would face, the thinktank said. This reflected the fact that threshold freezes raised the same amount of tax in cash terms on almost anyone earning above that threshold. “For example, someone on £62,000 loses as much from threshold freezes as someone on £124,000 in cash terms (£1,600) but twice as much as a share of income (2.6% v 1.3%).”

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Despite the tax-cutting aspirations of the chancellor and the prime minister, the IFS doesn’t see the underlying picture changing anytime soon. Tax as a share of national income will rise above 37% – four percentage points higher than its average over the last 40 years.

There are a number of reasons for that, according to Johnson. There is the cost of servicing the borrowing accumulated over the past 15 years. Annual debt interest payments will rise above £100bn in the coming years, higher than all public spending bar that on the NHS.

There is also the fact that the long-term decline in defence spending as a percentage of GDP has come to an end at a time when there are upward pressures from an ageing population.

Finally, Britain seems to have lost its growth mojo. Johnson says matters have been made worse through a series of own goals stretching back to 2010 – including cutting state capital spending, cuts in the budget for vocational education, Brexit and Kwasi Kwarteng’s mini-budget.

Hunt’s message as he toured TV and radio studios was that better times are ahead. Johnson’s message was that higher taxes are here to stay.



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