UK faces two decades of no earnings growth, IFS warns

The UK is in danger of suffering two decades of zero earnings growth as it struggles to cope with Brexit uncertainty and a loss of productivity, the Institute for Fiscal Studies has warned.

The thinktank said a downgrade in productivity and average wages for the next five years by the Treasury’s official forecaster, the Office for Budget Responsibility (OBR), would lead to an unprecedented period of flat earnings growth.

Paul Johnson, the IFS director, warned that the impact on the public finances would be to extend the time the chancellor needs to take to bring the deficit down, and limit his scope to ease the pressure on welfare and public services.

While the NHS was due to receive a funding increase, the government’s main austerity plans were still in place, he said.

“This is not the end of austerity. It is not even nearly the end of austerity. There are still nearly £12bn of welfare cuts to work through the system, while day-to-day public services spending is still due to be 3.6% lower in 2022-23 than it is today,” Johnson said.

To keep public services spending per head constant over the next five years would require a budget increase of £13bn more to 2022-23 than currently planned.

In forecasts to accompany the budget, the OBR said it expected GDP growth to remain below 2% for the next five years given the weaker outlook for productivity and wages.

“The immediate effects of all this on households are already being felt. Real earnings are falling this year as inflation has risen to 3%. The nascent recovery in earnings, which were growing through 2014 to the first half of 2016, has been choked off. That they might still be below their 2008 level in 2022 as the OBR forecast is truly astonishing. Let’s hope this forecast turns out to be too pessimistic,” Johnson said.

Earlier this month, the IFS said welfare cuts already in the pipeline affecting households with young families would mean the number of children living in poverty soaring by 1 million to a record 5.2 million over the next five years.

The IFS said freezing benefits, the introduction of universal credit and less generous tax credits would mean a surge in child poverty and the steepest increases would be in the most deprived parts of the country, reversing the progress made over the past 20 years.