How high taxes and low growth have squeezed Britain’s top earners

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The UK’s higher earners are on track for the biggest fall in their disposable income on record as Jeremy Hunt prepares to deliver a tax-cutting budget he hopes will save the Conservatives from electoral defeat.

The chancellor will at 12.30pm unveil further reductions to national insurance, on top of November’s near-£10bn cuts, alongside another year’s tax break for motorists and other measures aimed at wooing voters ahead of this year’s expected general election.

But sluggish economic growth, high inflation and a climbing tax burden have combined to deliver a formidable squeeze on living standards.

Analysis from the Resolution Foundation think-tank shows that the top third of households are set for a drop of more than 6 per cent in disposable incomes in the current parliament, a steeper decline than middle earners — or than the poorest whose incomes have stagnated.

So what are the key reasons for the harsh backdrop to what could be the current Conservative government’s final Budget? 

Growth

Hunt has repeatedly touted the UK’s overall economic performance since 2010, when a Conservative-led coalition headed by David Cameron took power. The UK is in the upper tier of G7 economies when looking at the evolution of overall GDP since that date. 

But this reflects in part the impact of population growth; official statistics show a less flattering picture when GDP is expressed per head of population. The story for per capita GDP growth is worse still since the eve of the pandemic, with the UK in the bottom tier of the G7 along with Canada and Germany.  

Incomes

This has translated into a miserable picture for household incomes during the current parliament. The squeeze reflects the impact of high inflation, which is finally expected to return to the Bank of England’s 2 per cent target in the coming months after hitting double-digit levels, as well as the country’s weak growth performance and a rising tax burden. 

Looking at real disposable income growth on a five-year average basis, the most recent period is the worst since current records began in the 1950s, Financial Times analysis shows. 

Strikingly, Resolution Foundation figures show that the top third of households are set to see the biggest drop of disposable incomes during the current parliament, based on the most recent forecasts from the Office for Budget Responsibility, the UK fiscal watchdog. The middle third will also see declines while the bottom third of the income distribution are on track for a marginal increase.

“While incomes have stagnated for poorer households, middle and higher income households will be considerably worse off at the time of the next polling day than they were at the last one,” said Adam Corlett, Principal Economist at the Resolution Foundation.

The pandemic, the cost of living crisis and long-term anaemic growth had all served to make Britain poorer, Corlett explained. With taxes rising to fund debt servicing costs and public services, better-off households have felt “the biggest hit overall”, while benefit support had cushioned some of the blow for vulnerable households.

Tax burden

One of the ironies of the November Autumn Statement was that Hunt won headlines for cutting national insurance contributions by 2 pence in the pound starting in January at the same time as the underlying tax burden continued to climb inexorably. 

Cuts in personal and business tax reduced the tax burden as a share of GDP by half a percentage point, according to OBR figures, but that still left the burden rising in each of the next five years to reach a postwar high of 38 per cent of GDP.

Hunt on Wednesday is widely expected to reduce national insurance again, with 2p off the main rate costing the Treasury close to £10bn a year. But analysis by the Institute for Fiscal Studies shows that another 2p cut to national insurance would only slow the rise in the tax burden; it would still reach those postwar highs in coming years.  

Part of the reason for this is a process known as “fiscal drag”, where freezes in personal tax thresholds announced earlier in the parliament boost receipts as stronger nominal wage growth pushes more taxpayers into higher tax bands. Those freezes, announced between March 2021 and November 2022, have swelled the income tax take, raising a combined £44.6bn in 2028-29, according to the OBR. 

Hunt will attempt to argue today that he can blunt some of the impact of those tax rises with new curbs on personal tax rates, as he seeks to maximise what is expected to be a threadbare amount of budgetary “headroom” under the Treasury’s fiscal rules.

Whether that message cuts through to voters will be a key swing factor when Britons go to the polls later this year.