Prepare for some potentially bad news: your household’s spending power is about to take a hit. According to the Institute for Fiscal Studies (IFS), families are facing a surprisingly small increase in their disposable income following the latest budget announcements. We’re talking about a “truly dismal” situation, as they put it. But here’s where it gets controversial…
The government’s official forecaster projects that average disposable income will grow by a mere 0.5% per year over the next five years. To put that in perspective for beginners, disposable income is simply the amount of money you have left after you’ve paid your taxes – the cash you can actually use for groceries, bills, and everything else. A 0.5% increase means your buying power isn’t keeping up with the rising costs of, well, just about everything. How can families save for the future with such little disposable income?
Furthermore, National Insurance contributions are also poised to rise due to changes in salary sacrifice pension payments and the freezing of tax thresholds. And this is the part most people miss… IFS Director Helen Miller went so far as to call this a potential “breach of the manifesto.” Why? Because pre-election promises matter, and shifting the goalposts after the fact can erode public trust.
To add fuel to the fire, the opposition leader, Sir Keir Starmer, pointed out that his party upheld their manifesto commitments. Before the last election, they explicitly promised not to raise taxes on “working people,” including National Insurance, Income Tax, and VAT. This raises the question: are the current policies breaking previous promises made to the people?
The current prime minister acknowledged that he was asking “everybody to make a contribution,” framing it as “fair and necessary.” He emphasized the importance of reducing the cost of living, recognizing it as a top priority for most people. However, the stark reality is that the projected growth in disposable income is far below historical averages. Miller highlighted that we used to see growth rates exceeding 2% per year across every parliament from the mid-1980s to mid-2000s. What has changed, and why are we seeing such a significant slowdown now?
The IFS estimates that average disposable income per person will rise by approximately £104 per year for the next four years, based on current inflation forecasts. This is hardly a life-changing amount, especially considering the rising cost of living.
“Before this Budget, the UK was faced with lacklustre economic growth, stagnating living standards, and a dizzying array of fiscal pressures,” Miller stated. “The same is still true after this Budget.” In other words, the budget hasn’t addressed the underlying economic problems.
The Resolution Foundation think tank echoed these concerns, predicting that the growth in living standards during this parliament would be among the worst on record. That’s a pretty bleak assessment. This raises an important question: are we setting ourselves up for a period of prolonged economic stagnation?
The Chancellor of the Exchequer, Rachel Reeves, extended the freeze on income tax thresholds for an additional three years beyond 2028. She also implemented a £2,000-a-year cap on pension contributions from 2029 onwards through a salary sacrifice arrangement before National Insurance payments become due. This means you’ll pay National Insurance on a larger portion of your salary.
Reeves defended the budget, insisting that it didn’t violate manifesto pledges, but conceded that the policies would “have an impact on working people.” She argued that this impact was minimized through other measures, such as increased taxes on online gambling, properties valued over £2 million, and income from dividends or rental properties. But are these measures truly enough to offset the negative impact on working families?
The Chancellor also highlighted initiatives designed to reduce the cost of living, including freezing NHS prescription charges and regulated rail fares in England, and eliminating green levies on energy bills. While these measures are welcome, their overall impact on household budgets may be limited.
When asked if she would apologize for breaking the promise not to raise taxes on working people, Reeves maintained that she made “fair and necessary choices” to address issues like NHS waiting lists, child poverty, and the cost of living. This highlights the inherent tension between fulfilling campaign promises and addressing pressing economic challenges. It’s a balancing act, but is the balance being struck fairly?
In the lead-up to the budget, there was considerable speculation about the UK’s financial situation and the economic outlook. The Chancellor faced significant challenges in meeting her fiscal rules on borrowing, leading to uncertainty in financial markets. Has the budget successfully addressed these concerns, or are we simply kicking the can down the road?
Analyzing the budget, Miller observed that the OBR’s “overall forecast downgrade was minimal” and that there was “no big fiscal repair job” to do. However, she also noted that the government seemed to have overlooked its primary objective of boosting economic growth. Isn’t economic growth the key to improving living standards in the long run?
“We shouldn’t expect every Budget to solve all of our problems, but I think it’s reasonable to expect that for a government that makes such a big deal of having growth as its number one mission, they would be doing more to drive up growth,” Miller stated. What specific actions could the government take to stimulate economic growth more effectively?
Miller suggested that Reeves could have reformed the tax system to stimulate the economy and that the government needs to make “hard yards” in areas such as competition policy, regulation, and education. This suggests that a more comprehensive and long-term approach is needed to address the underlying economic challenges. What are your thoughts on the effectiveness of the budget? Do you agree with the IFS’s assessment? How will these changes affect your household’s finances? Share your opinions and concerns in the comments below.