Thinktank’s budget analysis says forecasts for lower productivity, earnings and growth until 2022 were ‘pretty grim reading’
Britain’s leading financial thinktank has warned workers to expect an unprecedented two lost decades of earnings growth and many more years of austerity as a result of the marked slowdown in the economy announced in Philip Hammond’s budget.
The Institute for Fiscal Studies said in its traditional post-budget analysis that forecasts slashing productivity, earnings and growth in every year until 2022 made “pretty grim reading”, and predicted that even by the middle of the next decade, Britain’s public finances would still be in the red.
The Treasury said the reforms and investment announced by the chancellor were designed to build a country “fit for the future”, but opposition parties said the gloomy IFS report undermined the chancellor’s claims.
In its analysis of the budget and the report from the independent Office for Budget Responsibility, the IFS said:
- GDP per person will be 3.5% smaller in 2021 than forecast in March 2016. The loss of growth will mean the economy is £65bn smaller in 2021 than previously thought.
- Average earnings are on course to be £1,400 a year lower in 2021 than forecast in 2016. That means the recovery in wages will have failed to materialise and average earnings will be below their 2008 level adjusted for inflation.
- Borrowing will be £12bn higher in 2021 than was forecast in March.
- Despite a spending increase over the next five years, the NHS is facing its tightest funding constraints since the 1980s. Annual spending growth of 4% a year after inflation before the financial crisis has fallen to 1% a year at a time when the NHS is being stretched by an expanding and ageing population.
Paul Johnson, the IFS director, said the OBR’s decision to reduce its growth forecasts by one-quarter over the next five years would delay deficit reduction, limit Hammond’s ability to ease pressure on welfare and public services and harm living standards.
“We are in danger of losing not just one but getting on for two decades of earnings growth,” he said. “We will all have to get used to the idea that steadily rising living standards may be a thing of the increasingly distant past.”
The nascent recovery in earnings, which were growing through 2014 to the first half of 2016, had been choked off, Johnson said. “That they might still be below their 2008 level in 2022 as the OBR forecasts is truly astonishing. Let’s hope this forecast turns out to be too pessimistic,” he added.
John McDonnell said the IFS analysis “exposed the appalling failure of seven years of this government’s austerity economics and its grim consequences for working people”.
“Seven years of austerity has not only blighted lives and plunged our public services into crisis, it has also trashed productivity growth and dragged down living standards,” the shadow chancellor said.Advertisement
“This is a government and an economic policy that has completely failed by any conventional standard; they can serve no further purpose in office.”
The Liberal Democrats said the chancellor was bringing down the public spending deficit by “balancing the books on the backs of the poorest”.
Although Hammond announced extra money for the NHS and scrapped stamp duty for first-time housebuyers in his budget, the package was overshadowed by the OBR’s announcement that the economy would never recover from the damage caused by the financial crisis and its aftermath. It put long-term productivity growth at 1%, down from 2% before the crash.
A Treasury spokesman said an increase in the “national living wage” would be worth an extra £600 a year to low-income workers, while freezing fuel duty for the eighth year in a row and raising the income tax personal threshold would support hard-pressed families.
“The only way to improve living standards in the long term is to improve our productivity, which is why we are investing £30bn across the country in new infrastructure and skills, and delivering an ambitious industrial strategy,” he said.