UK household disposable income is falling at an unprecedented rate, Britain is “falling behind” comparable economies and the impact on living standards will be “dramatic”.
That is according to Paul Johnson, director of the Institute for Fiscal Studies (IFS), who told the Airport Operators Association (AOA) conference in London: “All the forecasts are gloomy.
“We have a stagnating economy. The UK Office for Budget Responsibility forecasts real GDP won’t return to the level of the fourth quarter of 2019 until 2025. The Bank of England forecasts no return by 2026.”
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Johnson dismissed an International Monetary Fund (IMF) forecast that Britain would be the only major economy to suffer a recession this year, saying he would “take it with a pinch of salt”, insisting: “We’re not in for a deep recession, [but] the economy will stagnate.
“We’re not going to catch up with competitor countries. We’re falling further behind and that will have a dramatic impact on living standards.”
He argued: “Inflation is the priority. Food inflation and energy are responsible for half the inflation rate and it’s not just about the war in Ukraine. Inflation was already 6% when Russia invaded. Core inflation has been stuck at 6% for a year.”
Johnson said: “The other worrying thing is pay, which is rising 7% a year [and] will push up inflation, but is not rising as fast as inflation. Real wages are going down. Real household disposable income is worse than at any period since records began in 1948.”
Public sector pay is even worse, he explained, with wage rises averaging 3% this year “after a period of falling further behind private sector pay”.
Johnson noted: “A lot of households are sitting on savings. But the cost of living is biting groups on lower incomes.”
The Bank of England (BoE) raised interest rates to 4% last week and Johnson said: “The latest forecast is rates will peak at 4.5% [and] then flatten out around 3% for the medium term. That would be great for the economy, but the transformation will be difficult.
He added: “We’re in a different position to most countries in the numbers of people not seeking work. We’ve lost about one million from the labour force [due] to early retirement and to people becoming sicker.
“It’s staggering what has happened to the health of the population. There has been a doubling of numbers claiming disability since 2021. There were 25% more deaths than normal this January.”
Johnson also identified severe pressure on government spending, noting: “Borrowing is at very high levels and debt is barely falling. The tax take, which has been 32%-34% of national income for decades, has gone up to 37%.”
He forecast: “Taxes will stay at a record level. I wouldn’t expect them to come down in my lifetime to the level they’ve been for 40 years.”
Johnson said: “There is lots of borrowing, lots of debt, lots of tax and not much money for spending. The government is spending more on debt interest than on any public service bar the NHS.”
He added: “The government has started the healing process since November by not being ridiculously stupid. But we need a long period of rebuilding.”
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