Respected thinktank says UK’s withdrawal from EU will stoke inflation and peg back wages to below their 2008 level in 2021
Workers in Britain face the longest squeeze on their pay for 70 years as Brexit knocks wage growth and stokes inflation, a leading thinktank has said.
Picking over Philip Hammond’s first autumn statement, the Institute for Fiscal Studies said that by 2021, real wages in the UK – pay adjusted for inflation – will still not have recovered to their 2008 level before the global financial crisis hit.
Paul Johnson, the thinktank’s director, said: “One cannot stress how extraordinary and 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 and quite possibly the last 100.”
Young people have been worst affected by a squeeze on wages since the crisis, and the effects of the Brexit vote look set to prolong that pain well into a second decade, on the IFS’s reckoning. Pensioners, on the other hand, would be largely protected from an expected sharp pickup in inflation on the back of a weaker pound.
The thinktank also said Hammond had done little to put “more money in people’s pockets” despite government pledges to help “just about managing” families or Jams. In fact, the impact of rising costs and a benefits freeze announced by George Osborne in 2015 would leave working households worse off.
“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,” it said.
The IFS analysis follow 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. Pricing rows over products such as Marmite and Walkers crisps have put shoppers on alert for rising weekly bills.
At the same time, experts say pay growth will stall as companies curb spending while they 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, with knock-on effects for household budgets and the government’s finances.
Those forecasts were picked up in a separate analysis from the Resolution Foundation thinktank showing that 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.
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 IFS also highlighted a stark contrast in the prospects of young and old as the Brexit process unfolds and exacerbates existing divisions between age groups.
It said most people would face similar changes in costs as inflation picks up, but what varied by age group was the extent to which income could keep pace with those costs.
Some forms of income, such as pensions, are protected from inflation because they rise to offset higher prices. Others, however, are not, including working-age benefits, which were frozen in Osborne’s 2015 post-election budget. At the same time, younger people see their income from work squeezed by inflation if pay rises fail to keep pace with living costs.
Campaigners said the likely blow to younger people exposed the unfairness of the the government’s triple-lock system, which has seen pensions rise every year since 2010 by the rate of inflation, average earnings or a minimum of 2.5%, whichever is higher.
Ashley Seager, the co-founder of the Inter-generational Foundation, said: “The government must stop caving in to the old-age lobby and say enough is enough. It cannot be right that 2 million wealthy oldies who need help the least are universally protected, while the young, who need help the most, are left to pick up the bill. The triple lock must go.”
The government has also faced criticism for presenting a partial reversal of planned cuts to universal credit as a boost to working households when in reality the giveaways will be more than offset by other cuts announced in 2015.
Hammond said in his autumn statement that 3m households would be better off as as result of changes to universal credit, which he described as a “targeted tax cut worth £700m from 2021-22”.
Frank Field, the Labour chair of the commons work and pensions committee, said only a small fraction of the 3m households would benefit in the short term.
“The £700m value of the taper change by 2021-22 only goes a small way towards offsetting the £3bn hit to working families caused by previously announced cuts to universal credit work allowances,” he said.
The IFS presented its outlook for living standards as the Treasury and eurosceptic MPs rowed over the OBR’s forecasts for Britain as it goes through Brexit.
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.”
Hammond also defended the OBR on Thursday, saying the government would be wrong to ignore its forecasts and that “economic forecasting is not a precise science”.