Budget will cost familes £3,000 a year
Families will be an average of £3,000 a year poorer under measures introduced by George Osborne in last month’s emergency Budget, a leading economic forecaster has warned.
George Osborne's Treasury forecast said the austerity drive would cost the top 10 per cent of households £1,600 in two years' time
Telegrapg co.uk., 11:16PM BST 21 Jul 2010
Household disposable incomes would fall by one per cent next year, the first decline since 1982, and would not improve until 2012, Capital Economics said.
It would be “the tightest squeeze” on families since the mid-1970s, Vicky Redwood, senior UK economist, said.
By 2015, the £40billion of tax rises and spending cuts unveiled in the Budget would have eroded about 8pc of average household income – or £3,000 out of £36,000, the forecaster said. Next year would be the toughest single stretch as VAT is increased to 20pc, public sector pay is frozen and jobs are cut – leaving households £1,100 worse off.
“Consumers clearly stand to be amongst the biggest losers in the fiscal squeeze,” Miss Redwood said.
The figures paint a much gloomier picture of post-recession Britain than the Budget statistics. The Treasury predicted that the austerity drive would cost the top 10 per cent of households £1,600 in two years’ time, average earners between £300 and £600, and the poorest £180. But Capital Economics, which admits to a more pessimistic outlook than most, believes the tax measures alone next year will cost the average household £550. The figure doubles after the impact of pay freezes and job cuts.
The Office for Budget Responsibility, the Treasury’s public finances watchdog, has warned workers of a real-terms pay cut this year and next as inflation outstrips salary rises.
The bleak forecast came as the Bank of England reported that the economy had “deteriorated a little” in the past month and that the Budget may have harmed short-term growth prospects, despite reducing longer-term risks. For the first time since February, the Bank raised the prospect of restarting its so-called “money printing” programme to stimulate growth.
Economists said the minutes from this month’s rate-setting meeting suggested that interest rates, currently at a record low of 0.5 per cent, would remain lower for longer. James Knightley, of ING Financial Markets, said: “We forecast the first rate hike for 3Q11 [the third quarter of next year]”.
Ms Redwood warned that the outlook for households could be worse than her predictions. “We expect overall real household disposable incomes [after inflation] to rise by 0.5pc or so this year, before falling by 1pc or so in 2011 and flatlining in 2012.
“This would be the tightest squeeze on incomes since the mid-1970s, when real incomes fell by almost 3pc in 1976 and 1977. And if we are right in thinking more fiscal tightening is yet to come, the squeeze could turn out to be worse.”
Families were hit hard in the Budget to pay for a £6billion tax cut to business in an attempt to preserve jobs. Although the Budget contained overall tax rises of £8.2billion, households’ taxes rose by nearly £11billion “to help pay for cuts in corporation tax and the rise in the threshold for employers’ national insurance contributions”, she said.
Ms Redwood added: “The fiscal squeeze, combined with continued deleveraging (cutting debt), will condemn consumer spending to a period of extraordinary weakness,” she said.
“Consumers clearly stand to be amongst the biggest losers in the fiscal squeeze,” Miss Redwood said.
The figures paint a much gloomier picture of post-recession Britain than the Budget statistics. The Treasury predicted that the austerity drive would cost the top 10 per cent of households £1,600 in two years’ time, average earners between £300 and £600, and the poorest £180. But Capital Economics, which admits to a more pessimistic outlook than most, believes the tax measures alone next year will cost the average household £550. The figure doubles after the impact of pay freezes and job cuts.
The Office for Budget Responsibility, the Treasury’s public finances watchdog, has warned workers of a real-terms pay cut this year and next as inflation outstrips salary rises.
The bleak forecast came as the Bank of England reported that the economy had “deteriorated a little” in the past month and that the Budget may have harmed short-term growth prospects, despite reducing longer-term risks. For the first time since February, the Bank raised the prospect of restarting its so-called “money printing” programme to stimulate growth.
Economists said the minutes from this month’s rate-setting meeting suggested that interest rates, currently at a record low of 0.5 per cent, would remain lower for longer. James Knightley, of ING Financial Markets, said: “We forecast the first rate hike for 3Q11 [the third quarter of next year]”.
Ms Redwood warned that the outlook for households could be worse than her predictions. “We expect overall real household disposable incomes [after inflation] to rise by 0.5pc or so this year, before falling by 1pc or so in 2011 and flatlining in 2012.
“This would be the tightest squeeze on incomes since the mid-1970s, when real incomes fell by almost 3pc in 1976 and 1977. And if we are right in thinking more fiscal tightening is yet to come, the squeeze could turn out to be worse.”
Families were hit hard in the Budget to pay for a £6billion tax cut to business in an attempt to preserve jobs. Although the Budget contained overall tax rises of £8.2billion, households’ taxes rose by nearly £11billion “to help pay for cuts in corporation tax and the rise in the threshold for employers’ national insurance contributions”, she said.
Ms Redwood added: “The fiscal squeeze, combined with continued deleveraging (cutting debt), will condemn consumer spending to a period of extraordinary weakness,” she said.
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