Most people will be left worse off this year despite the massive package of Government support to deal with the cost of living crisis, a leading economic think tank has warned.
The Institute for Fiscal Studies (IFS) said soaring prices meant a median earner will be £500 worse off in real terms than they were last year – a cut of around 3% in their income.
In an online presentation ahead Chancellor Kwasi Kwarteng’s mini-budget on Friday, the IFS said higher earners would be £1,000 worse – an even bigger percentage drop in their income – although those on low incomes or who are out of work will be “more shielded”.
The energy price shock has made us poorer and we will be worse off
Paul Johnson, IFS
“I am afraid that the energy price shock has made us poorer and we will be worse off. The Government can spread the pain over time and between people but in the end it is not going to be able to magic it away,” said IFS director Paul Johnson.
Mr Kwarteng is expected to use the “fiscal event” to set out details of how the Government will fund the energy price cap announced earlier this month by Liz Truss while confirming plans to scrap the planned increase in corporation tax and reverse the hike in national insurance.
Mr Johnson said that even though it will not be a full budget, it looked set to be the biggest tax giveaway for more than 30 years.
“This will actually, we think, be the biggest tax-cutting fiscal event since Nigel Lawson’s budget of 1988,” he said.
In an analysis published on Wednesday, the IFS warned the Government was putting the public finances on an “unsustainable path” with borrowing set to hit £100 billion a year even after the energy support package has ended – more than double the official forecasts last March.
With debt potentially set on an “ever-rising path”, it said the Government’s claim that reducing tax rates would lead to sustained economic growth was “a gamble at best”.
The prospect of persistent deficits in the current budget and debt rising as a share of national income meant, it said, both the main fiscal targets set in January will have been missed.
Levelling up secretary Simon Clarke acknowledged there were dangers attached to the Government’s approach but insisted there were “no risk-free options” in the current global crisis.
“Having come straight out of the global pandemic and into the teeth of Russia invading western Europe, these are extraordinary times,” he told ITV’s Peston programme.
“But the real risk I think here lies in us being too passive in the face of those challenges, of accepting that we are in this economic low-growth trap.”