UK Households Feel the Squeeze: What's the Deal with Disposable Income?
The UK government's recent budget has left many households feeling the pinch. Experts warn that disposable income is expected to grow by a mere 0.5% annually over the next five years.
Key Factors
- National Insurance Increase: A rise in this tax, coupled with frozen tax thresholds and pension contribution limits, is a major contributor to the slow growth.
- Broken Promises? Some argue these measures contradict pre-election pledges, though the prime minister insists everyone must contribute to the country's needs.
Historical Context
The Institute for Fiscal Studies (IFS) highlights a stark contrast to past decades, where income growth averaged over 2% annually from the 1980s to the 2000s. Now, growth is projected at just £104 per year for the next four years.
Economic Challenges
- Pre-existing Issues: The UK was already grappling with slow economic growth and high living costs before this budget.
- Worst Growth in Living Standards: The Resolution Foundation warns that this budget's impact on living standards may be among the worst ever recorded.
Chancellor's Choices
Rachel Reeves, the chancellor, has implemented several measures:
- Frozen income tax thresholds for three more years.
- Capped pension contributions.
She argues these steps are essential to support the NHS, reduce poverty, and lower living costs. However, critics claim these policies break election promises.
Financial Market Reactions
Before the budget, concerns about the UK's financial situation caused uncertainty in financial markets. Yet, the Office for Budget Responsibility (OBR) asserts that the overall forecast remains stable, with no significant financial crisis looming.
Expert Recommendations
Helen Miller from the IFS suggests the government should:
- Reform the tax system.
- Focus on competition policy, regulation, and education.
- Prioritize economic growth, as it should be the government's top objective.
