Families face a worse squeeze on their living standards over the next five years than they suffered in the wake of the financial crisis, as Brexit slows the economy and Conservative welfare cuts bite, according to a new report.
Analysis of Wednesday’s autumn statement by the Resolution Foundation thinktank suggests average earnings are set to grow only half as rapidly as in the austerity years after the economic crisis. At the same time, living standards will be undermined by higher inflation and ongoing welfare cuts.
While the squeeze of the last parliament affected workers across the income spectrum, the foundation says low-paid households are set to be hardest hit over the next five years, because they are particularly affected by planned welfare cuts.
The chancellor, Philip Hammond, announced a modest softening of cuts to universal credit in the autumn statement, but a £3bn cut in the “work allowance” claimants can earn before their benefits are withdrawn will go ahead.
His predecessor George Osborne also previously announced a four-year cash freeze in most in-work benefits, which will go ahead.
The foundation’s director, Torsten Bell, said: “The combination of lower growth, higher inflation and the government’s decision to press ahead with big welfare cuts means that households risk experiencing even slower income growth in this parliament than they saw in the aftermath of the financial crisis.
“But unlike the last parliament, it will be low- and middle-income households who feel the tightest squeeze this time round.”
The researchers said the entire bottom third of the income distribution would see their real incomes fall in the years ahead.
The foundation cites forecasts from the Office for Budget Responsibility (OBR), which predicted a challenging fiscal climate in the face of Brexit and wider international economic uncertainty.
The increase in borrowing set out in the autumn statement is so severe that national debt as a percentage of GDP is expected to be higher at the end of the parliament than the beginning, the research found.
Osborne had targeted a surplus of £11bn on the public finances by 2020-21, now forecast to be a £21bn deficit, with public debt peaking at more than 90% of GDP.
Though Hammond announced some modest borrowing to invest in projects including infrastructure and housing, the foundation’s research said that cash would be “wiped out several times over by an expected fall in private sector investment”.
In total, the OBR said it expected the chancellor to have to borrow an extra £122bn over the next five years.
The shadow chancellor, John McDonnell, said Hammond’s decision to press ahead with cutting corporation tax to 17%, despite the outlook for lower-income families, showed the wrong people were being hit by the uncertainty.
“We would make sure that instead of giving tax giveaways to the wealthy and corporations, and ignoring the issue of tax avoidance and tax evasion, we would make sure we had a fair taxation system,” he told BBC Radio 4’s Today programme. “We’re not talking about increasing taxes; we are saying we want to use our resources more effectively.
“They have given tax giveaways on capital gains tax, corporation tax, inheritance tax to the wealthy in our community and corporation, cutting universal credit to people [who are] just about managing … people going into work, looking after their families, doing everything they ask for, so they have got the wrong priorities.”