Budget backlash

The day after Rishi Sunak was mobbed at the pub by merry drinkers in the wake of his big-spending Budget, the hangover is starting to kick in.

Damning analysis by leading think tanks suggests the Chancellor’s plans will leave millions of Brits worse off as the cost of living crisis bites.  

The Institute for Fiscal Studies says middle-earners are on course to lose an average of £180 per year, with small wage increases being wiped out by inflation and higher tax on incomes.

Paul Johnson, the IFS director, poured cold water on Sunak’s cheerful promise of “a new age of optimism”, saying that voters wouldn’t get much “feelgood factor” and that “high inflation, rising taxes, and poor growth, still undermined more by Brexit than by the pandemic, will see real living standards barely rising and, for many, falling over the next year.”

He described the Chancellor’s plans as a “once in a decade event”, drawing parallels with Geoffrey Howe’s 1979 Budget in which he set out a new monetarist agenda, cutting direct taxes and upping VAT, and Gordon Brown’s 2002 shift to big-tax-big-spend government.

The OBR’s former chairman, Robert Chote, says that Sunak, despite his purported Thatcherite credentials, “has chosen to repair the fiscal damage from the pandemic through tax increases rather than spending cuts.”

Yet one thrust of the Budget backlash is that Sunak is using the pandemic as a fig leaf to disguise a broader political shift. According to Johnson, “[The Budget] is almost entirely a set of policy choices unrelated to the pandemic.

“What we have had is a chancellor responding to the ever-increasing demands of the healthcare system on the one hand, and the increasingly dire plight of the likes of the justice, social care and prison systems, starved of funding for a decade, on the other.”

Johnson homed in on the discrepancy between spending on health (set to be 40 per cent higher than 2010) and education, which is due for a rise of just 3 per cent. “This is not a set of priorities which looks consistent with a long term growth strategy. Or indeed levelling up.”

Meanwhile, the Resolution Foundation has warned that middle-earners will take a two per cent income hit, amounting to around £3,000 a year. The UK was, it said, “in the midst of its weakest decade for pay growth since the 1930s”.

The Foundation points out that between 1992 and 2008, real wages grew by 36 per cent, compared to an expected rise of just 2.4 per cent between 2008 and 2024.

Ahead of the Bank of England’s Monetary Policy Committee meeting next week, the OBR says rising inflation – which it predicts will hit four per cent next year – may prompt the Bank to hike interest rates from a historic low of 0.1 per cent to 0.75 per cent by end of 2023.

Homeowners are already facing soaring mortgage payments in the coming year after HSBC, NatWest and Barclays all upped their fixed-term rates today.

All this could add up to one hell of a headache for the Chancellor in the months ahead.