Middle-income families are set to be worse off next year amid spiralling costs and tax rises, says an independent economic think tank.
Paul Johnson, director of the Institute for Fiscal Studies (IFS), said that inflation and higher taxes on incomes would negate small wage increases.
The government’s forecaster warned on Wednesday that the cost of living could rise at its fastest rate for 30 years.
The chancellor acknowledged in his Budget that families are under strain.
In its analysis of Chancellor Rishi Sunak’s second Budget of 2021, the IFS described the chancellor’s delivery as “upbeat”.
But Mr Johnson added: “Unfortunately for him, and for us, the outlook for living standards does not match this upbeat tone.”
Over the next few years, increases to income tax and national insurance, paired with rising household bills, “will mean very slow growth in living standards”, he said.
On Wednesday, the independent Office for Budget Responsibility’s (OBR) latest forecast revealed that inflation, which measures the change in the cost of living over time, is set to jump from 3.1% to an average of 4% in 2022.
The chancellor conceded that the inflation rate was “likely to rise further” from its 3.1% rate in September.
He said that was because of increased demand for energy and supply chain issues as economies and factories recover from coronavirus curbs.
‘Real pain’
New IFS analysis suggests that over the next year, middle earners will find their pre-tax pay just about outpaces price rises.
But once extra income taxes are due, their take-home pay will fall by about 1%, or £180 per year, after accounting for inflation.
“Millions will be worse off in the short term,” Mr Johnson said.
Mr Sunak defended his Budget, telling BBC Breakfast that it had “cut taxes for millions of the lowest-paid”.
On Wednesday, the chancellor announced that the universal credit “taper” rate would be cut by 8% no later than 1 December, so that instead of losing 63p of benefit for every £1 earned above the work allowance, the amount will be reduced to 55p.
The National Living Wage will also increase next year by 6.6%, to £9.50 an hour.
Mr Sunak added that it was his job to be concerned about inflation and his new fiscal rules were “how we build up resilience”.
But Paul Johnson said that price rises meant that “real pain” would now be felt, as low-income households wait for their incomes to catch up.
“For some in work, that may never happen,” he said.