UK faces higher taxes, lower living standards after Budget, say think tanks

Taxes as a share of national income are expected to hit 37.7% by 2027, the highest in 70 years, while the freezing of tax-free thresholds will pull in an extra £30bn in revenue in that time, according to the Resolution Foundation and Institute for Fiscal Studies.

This would represent a 4.7% increase since pre-Covid pandemic 2019-20 and the equivalent to nearly an extra £4,200 for every UK household.

Household disposable incomes were also on track to remain lower by the end of the 2027-28 forecasting period than they were before the Covid crisis.

"Britain's economy remains stuck in a deep funk - with people supported into work but getting poorer, and paying more tax but seeing public services cut," the foundation said in its post-budget analysis.

The decision by Finance Minister Jeremy Hunt to abolish the £1m lifetime tax-free pensions limit, effectively giving a £1bn tax break to 15,000 earners in an effort to entice them to stay in work longer, was also attacked.

Resolution called the move “hugely wasteful”, saying it would cost £80,000 per extra worker and give someone with a £2m pension pot a tax cut of almost £250,000. Children of wealthy earners could also inherit the cash without incurring tax.

IFS director Paul Johnson said it “probably won’t play a big part, if any” in achieving its aim. “It was disappointing that other over-generous aspects of pension taxation – not least complete freedom from inheritance tax – were not reined in,” he said.

“The lack of any coherent strategy here remains deeply disappointing. Don’t forget these changes are largely a rowing back on changes made just a few years ago by this government.”

Britain's main opposition Labour Party, already campaigning for a election due by 2025, on Thursday said it would repeal the move.

Resolution Foundation head Torsten Bell said Hunt had also chosen to "ignore pressures on public services" which face another round of austerity as unprotected government departments face 10% cuts to real day-to-day spending per capita by the end of the budget, rising to 14% if the newly announced aspiration to raise defence spending to 2.5% of GDP is met over the next parliament.

The Independent Office for Budgetary Responsibility said living standards are still set to record their biggest two-year fall in seven decades, while the tax burden also increases for millions of people.

Real household disposable income (RHDI) per person – a measure of real living standards – is expected to fall by a cumulative 5.7% over this financial year and 2023-24, the OBR said in its fiscal outlook published alongside the Budget.

"While this is 1.4 percentage points less than forecast in November, it would still be the largest two-year fall since records began in 1956-57," the OBR said. "This means that real living standards are still 0.4% lower than their pre-pandemic levels in 2027-28."

The freeze in the tax-free personal allowance of £12,570 and other thresholds until April 2028 means the Treasury will rake in almost £30bn extra in tax receipts - the equivalent of a 4p rise in income tax, it added.

"Based on our latest forecasts for earnings growth and CPI inflation, these measures are expected to generate 3.2 million (9% more) new taxpayers, 2.1 million (47% more) new higher-rate taxpayers, and 0.35 million (47 per cent more) additional-rate taxpayers by the end of the forecast than would have been had the thresholds continued to be uprated with inflation."

Reporting by Frank Prenesti for Sharecast.com