When Philip Hammond stands up to give his budget on Wednesday, this is what you are likely to hear: economic growth has been, and will be, stronger than expected after the Brexit vote. Defying all the doomsayers who said a vote to leave could prompt a recession, consumers carried on spending and businesses continued to expand.
The picture for the public finances is also looking rosier compared with Hammond’s maiden autumn statement in November. Back then, the fiscal watchdog, the Office for Budget Responsibility (OBR), overhauled its forecasts to show that the impact of the Brexit vote on the economy would force the government to borrow £122bn more than hoped over coming years. Less than four months on, healthy tax receipts mean the government has not borrowed as much as previously feared to fund its spending over this financial year.
In other words, when the chancellor presents what is to be the last spring budget before it moves to the autumn, he will be in the rare position of unveiling an improvement in the public finances. That is quite a contrast to the recent trend of confessing on budget day that the deficit will be higher than previously thought.
This all makes for rather nice headlines and will no doubt prompt Hammond to utter soothing words about how the UK can embark on Brexit negotiations from a firm footing.
But here’s what the chancellor will not tell you: living costs have gone up and will continue to do so. The poorest will be hit hardest as the cost of essentials such as food and heating take a growing chunk out of already tight family budgets. Wages will struggle to match rises in inflation and the government’s benefit cuts mean that incomes will fall for the poorest people in Britain. In short, unless the government does something significant to improve living standards this week, inequality will start rising again.
The interesting forecasts to watch for on budget day will be what the OBR thinks will happen to inflation, real wages and household spending over coming years. Those projections will give a far better picture of how policy decisions and the economic backdrop are very likely to affect people’s day-to-day lives than the deficit projections and GDP estimates.
The picture will be completed on Thursday, when the Institute for Fiscal Studies (IFS) conducts its traditional post-budget number crunching to spell out what it all means for different income groups.
At that point it becomes much harder for Hammond and his fellow ministers to hide behind the happy headlines of faster growth and lower borrowing. That is because the kind of distributional analysis by the IFS and other thinktanks lays bare how a change such as raising an income tax threshold can mean a windfall for some but make no difference to others.
It also exposes how benefit changes will raise or reduce the incomes of those claiming them while having no impact on those who do not; thereby potentially widening or narrowing inequalities. Such analysis can also highlight how there is no such thing as one inflation rate for everyone. Living costs tend to rise at different rates depending on how rich or poor someone is.
Based on what we have seen so far in those three areas of tax policy, benefits and inflation, the government’s pledge to create a more equal society is way off track.
There are some positive policies that warrant a mention. The higher minimum wage, dubbed the national living wage by the government, has helped low paid workers. The push for more apprenticeships should get more young people on to decent career paths. More childcare provision has helped parents.
But the bigger picture is that in the middle of a rise in living costs, welfare cuts are piling on extra pressure and tax changes are helping the wealthy more than the poor.
A study by the IFS before the budget found that if welfare cuts are implemented as planned, the poorest 15% of the population are likely to have lower incomes in five years’ time as a freeze in benefits and universal credit – which on average will be less than the benefits it replaces – take their toll.
Part of the Treasury’s response to that report was to highlight how it was “cutting taxes for millions of working people”. There have indeed been successive rises over recent years to the tax-free personal allowance – the amount someone can earn without having to pay income tax. But it is a costly thing to do and the gains have disproportionately gone to households higher up the income scale.
Finally there is the matter of inflation. The consumer prices index (CPI) puts UK inflation at 1.8%. That is low by historical standards but still the highest rate we have seen for more than two years. Inflation is expected to rise further this year, pushed up by higher global oil prices and by the effects of the pound’s devaluation since the Brexit vote. A weaker currency increases the cost of the UK’s many imports, such as food ingredients and metals.
But that headline figure is only part of the story. Inflation is a measure of how one big basket of goods and services has changed in price over time. The basket is designed to reflect spending patterns but it will never truly reflect any one person’s actual spending.
So when rising food prices drive a rise in inflation, as is currently the case, poorer households will feel that more acutely because they spend a bigger proportion of their money on food.
The poorest fifth of the population spend £1 in every £6 on food– for the richest fifth it is just £1 in every £12, according to an analysis of official figures by the Joseph Rowntree Foundation.
So given that spending patterns differ, it follows that the cost of living rises at different rates for different people.
In his book, The Truth About Inflation, the economist Paul Donovan highlights this and what he sees as the “inflation inequality” that has accompanied a rise in income inequality.
His calculations reveal a striking contrast between the rises in costs faced by the richest 20% and poorest 20% in a number of advanced economies in recent decades. In the UK, between 1997 and the beginning of 2017, prices for the richest fifth rose 40% but for the poorest fifth they increased by 51%.
As the cost of food and other essentials start to pick up again, a government vowing to help everyone would do well to consider Donovan’s evidence on inflation inequality.
“The past two or three decades have seen inflation rates for lower-income groups in society rise faster than inflation rates for higher income people,” he says in the book. “Put simply, it is cheaper to be rich than it is to be poor.”
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