Workers in Britain face the biggest squeeze on their pay for 70 years as Brexit knocks wage growth and stokes inflation, according to an analysis of the UK’s government’s latest tax and spending plans.
Picking over Philip Hammond’s autumn statement, the Institute for Fiscal Studiessaid real wages in the UK – pay adjusted for inflation – will still be below their 2008 level in 2021.
Paul Johnson, the thinktank’s director said: “One cannot stress how dreadful that is – more than a decade without real earnings growth. We have certainly not seen a period remotely like it in the last 70 years.”
His comments follows signs that the pound’s sharp fall since the referendum result is hiking the cost of UK imports and could soon be passed on to consumers. At the same time, experts say pay growth could stall as companies grapple with political and economic uncertainty.
The government’s independent forecasters, the Office for Budget Responsibility, said on Wednesday that the economy would slow next year and inflation would rise.
In a separate analysis of the autumn statement, the Resolution Foundation thinktank said families faced a worse squeeze on their living standards over the next five years than they suffered in the wake of the financial crisis.
Its report suggested average earnings were set to grow only half as rapidly as in the austerity years after the economic crisis. At the same time, living standards would be undermined by higher inflation and ongoing welfare cuts.
Johnson noted that despite government rhetoric in the run-up to the autumn statement, Hammond offered relatively few giveaways for “just about managing” families, dubbed Jams. “Given the choice between jam today in the form of more money in people’s pockets and jam tomorrow in the form of potential economic returns from greater investment, he went for jam tomorrow.”
In response to anti-EU MPs’ attacks on the OBR for being overly pessimistic, the IFS noted the watchdog’s growth forecasts were “noticeably more upbeat than the Bank of England’s”.
“Overall, despite some of the headlines, I think we can count the OBR as having been modestly upbeat relative to some other forecasters,” said Johnson. “Even so, the outlook for living standards and for the public finances has deteriorated pretty sharply over the last nine months. Mr Hammond has responded by increasing capital spending and hence increasing borrowing further.”
The IFS noted that Hammond had adopted new fiscal rules and abandoned plans by his predecessor, George Osborne, to return the public finances to a surplus by the end of the decade.
“Given the still very considerable uncertainties over the direction of the economy, he may well find he needs all the headroom he has left himself,” said Johnson. “It seems right that this autumn statement had the feeling of a ‘wait and see’ fiscal event.”