Traditionally, elections in Britain are decided by swing voters in a relatively small number of seats. Parties are making considerable efforts to adapt their policies to the perceived demands of those with middle incomes. Pollsters have even coined names for the archetypal voters to be wooed: the man from Basildon and the woman from Worcester.
It will therefore be of concern to government strategists that analysis of the post-fall statement by think tanks focuses heavily on how the measures announced by Jeremy Hunt would affect those who are not particularly poor but not particularly wealthy either. The Resolution Foundation and the Institute for Fiscal Studies have each highlighted the return of the “squeezed middle”.
Obviously, life will not be easy for anyone over the next year. Britain has already experienced a lost decade of stable living standards since the global financial crisis and is now heading for another. The IFS calculates that by the mid-2020s, real household disposable income would have been a third higher if the steady pre-GFC upward trend had continued.
But IFS director Paul Johnson said it would be those on ‘middle’ incomes who would be hit hardest by Jeremy Hunt’s measures, as their taxes went up, their wages went down and they wouldn’t benefit from targeted support for those receiving means-tested benefits.
“The center of England is about to take a shock,” Johnson predicted. “Put all the tax and social changes together and you get progressive tax reporting – tax hikes for the rich and increased targeting on the poor. It’s just that virtually all of us can expect to be worse off.
The Resolution Foundation said the decision to use ‘stealth’ freezes of tax thresholds to raise funds rather than raising tax rates meant the overall impact was to squeeze middle-income households as well than high-income households.
A typical household faces a permanent income of 3.7% because of the measures – the same as the fifth of the wealthiest households, and higher than the 3% income that the 20th of the wealthiest households faces, said the think tank. This reflected the fact that threshold freezes raise the same amount of cash tax for almost everyone who earns above that threshold. “For example, someone with £62,000 loses as much from the threshold freeze as someone with £124,000 in cash (£1,600) but twice as much as an income share (2.6% versus 1. 3%).”
Despite the Chancellor’s and Prime Minister’s tax cut aspirations, the IFS does not see the underlying situation changing anytime soon. Tax as a share of national income will exceed 37%, four percentage points higher than its average for the past 40 years.
There are several reasons for this, according to Johnson. There is the cost of servicing loans accumulated over the past 15 years. Annual debt interest payments will exceed £100billion in coming years, which is more than all public spending except that of the NHS.
There is also the fact that the long-term decline in defense spending as a percentage of GDP has come to an end at a time when there are upward pressures from an aging population.
Finally, Britain seems to have lost its growth mojo. Johnson says things have been made worse by a series of own targets dating back to 2010 – including cutting state capital spending, cuts to the vocational education budget, Brexit and the mini budget by Kwasi Kwarteng.
Hunt’s message during his tour of television and radio studios was that better times are ahead. Johnson’s message was that higher taxes are here to stay.