IFS Warns of Dismal Growth in Household Spending Power Following Latest Budget

The Institute for Fiscal Studies has delivered a stark assessment of the government’s Budget, warning that households face a troubling outlook for living standards over the coming parliamentary term. The influential think tank has accused Labour of breaching manifesto commitments whilst projecting minimal growth in disposable incomes.

According to the Office for Budget Responsibility, average disposable income is forecast to increase by merely 0.5 per cent annually over the next five years. IFS director Helen Miller characterised this projection as “truly dismal”, noting that it translates to approximately £104 per person per year under current inflation expectations.

The think tank’s criticism centres on several fiscal measures introduced in the Budget, including the rise in National Insurance, the imposition of a £2,000 annual cap on salary sacrifice pension contributions from 2029, and the continued freezing of tax thresholds. Ms Miller stated these measures constitute a breach of Labour’s pre-election pledge not to increase taxes on working people.

The Resolution Foundation has corroborated this pessimistic outlook, predicting that living standards growth during this parliament will rank as the second worst on record. The IFS highlighted that the projected growth rate compares unfavourably with the sustained annual increases exceeding 2 per cent achieved across every parliament from the mid-1980s to the mid-2000s.

Ms Miller observed that despite the Budget, fundamental economic challenges remain unaddressed. “Before this Budget, the UK was faced with lacklustre economic growth, stagnating living standards, and a dizzying array of fiscal pressures,” she stated. “The same is still true after this Budget.”

The prime minister defended the government’s position, asserting that Labour had maintained “a number of commitments in our manifesto”. He acknowledged that the Budget requires “everybody to make a contribution”, describing this approach as “fair and necessary” whilst emphasising his desire to reduce the cost of living for most citizens.

Chancellor Rachel Reeves similarly rejected accusations of manifesto breaches, though she conceded her policies would have “an impact on working people”. She maintained this impact had been kept “to a minimum” through compensatory measures, including increased taxes on online gambling, properties valued above £2 million, and income derived from dividends or property rentals.

The Budget extended the freeze on income tax thresholds for three additional years beyond 2028, a measure that draws taxpayers into higher brackets as wages rise. The chancellor sought to offset criticism by highlighting cost-of-living initiatives, including frozen NHS prescription charges and regulated rail fares in England, alongside the removal of green levies from energy bills.

When questioned about breaking pledges on taxation, Ms Reeves defended her choices as necessary to address NHS waiting lists, child poverty and living costs. She declined to offer an apology for the tax increases affecting working people.

In her Budget assessment, Ms Miller noted that the OBR’s overall forecast downgrade proved minimal, with no significant fiscal repair required. However, she expressed concern that the government appeared to have neglected its stated primary mission of boosting economic growth.

The IFS director suggested that whilst budgets cannot resolve all economic challenges, it remains reasonable to expect more substantial growth-driving measures from a government that emphasises growth as its foremost objective. She identified tax system reform as a potential lever for economic improvement, noting that considerable work remains necessary in areas including competition policy, regulation and education.

Pre-Budget speculation regarding public finances and economic outlook had generated uncertainty in financial markets. The extent to which the chancellor faced constraints in meeting fiscal rules on borrowing had been subject to considerable debate amongst analysts and commentators.

The disposable income measure tracks earnings remaining after taxation, providing a key indicator of household financial health and spending capacity. The projected stagnation in this metric suggests limited improvement in material living standards for British households throughout the current parliament.