The Chancellor painted a bleak economic picture when he stood up to give his Autumn Budget this week, but it was a warning that Brits face an unprecedented two decades of lost wage growth from the Institute of Fiscal Studies (IFS) that stole my attention.
Now, Budget Day is a big deal in our house; it’s circled in the calendar months in advance, potential leaks are discussed over dinner and we always celebrate with a takeaway – neither my husband or I usually have enough energy to cook for the family after an afternoon of heavy fiscal analysis.
But this year the Chancellor delivered a Budget that failed to give a nod to those at the heart of the consumer squeeze – which left me with relatively little to do.
Living standards in jeopardy
The Autumn Budget shone a light on a less-than savoury economic performance, with the Office for Budget Responsibility (OBR) now expecting GDP per capita to be 3.5% smaller in 2021 than expected two years ago.
That’s not ideal, especially as GDP growth is already lagging behind other G7 economies. The shift represents a £65 billion loss to the economy, according to the Institute for Fiscal Studies (IFS).
Blasting the Autumn Budget for being more about the OBR’s forecasts than the Chancellor’s policy decisions, the IFS warned that average earnings are set to be nearly £1,400 lower in 2022 than forecast two years ago – keeping them locked below their 2008 level.
This puts Brits in danger of losing two decades of earnings growth, which is unprecedented and a worry for those already having to tighten their household budgets.
What did we learn from the Autumn Budget?
Whilst I’d be remiss to ignore the positive points on eradicating homelessness and tackling climate change – I’m here to focus on the impact Hammond’s fiscal policies will have on the money in your back pocket – and on that subject he gave relatively little.
An increase in the personal allowance to £11,850 for basic rate taxpayers and £46,350 for the higher rate threshold will let Brits keep more of their money, which they can then choose what do with – hopefully save or invest.
But this was just Hammond keeping to former Chancellor George Osborne’s pledge to increase the basic rate allowance to £12,500 and higher rate allowance to £50,000 by 2020.
Unfortunately, freezing the so-called indexation allowance could result in pension savers having to pay more in tax. Tax is currently on paid on the real return of pension investments, but the government change would mean tax is payable on the whole return instead.
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This could cost savers hundreds, although Royal London puts this more in the £25-£50 mark for their customers.
On a personal finance level, Hammond composed the Autumn Budget as a crescendo piece. All his fiscal notes were played to emphasise his grand finale – scrapping stamp duty charges for first time buyers.
Framed as a scheme to get more people on the housing ladder, it immediately came under fire for fears it would do the opposite.
Without increasing the supply in line with an increase in demand, house prices will be pushed even higher – exacerbating the problem not fixing it.
Decades of chronic undersupply has meant that government schemes designed to help Brits onto the housing ladder has flooded the market with supply, which has inflated prices even further.
Hammond unveiled planning reform and a £44 billion package designed to support the housing market by boosting the supply of skills, resources and building land. The hope is that this will help housebuilders construct 300,000 new homes a year on average, over the next decade.
If this works, it will slowly drip-feed through into the supply of homes, levelling out the supply/demand dynamics of the housing market. Until then, removing stamp duty will likely just help those who are already close to owning their own home.
What this means for you
With household budgets only set to get tighter, Brits needs to make their money work harder for them today.
Ring-fence your monthly savings habit and regularly remind yourself of your financial goals. If things get a bit tight, adjust your monthly budget instead of compromising on how much you save – your future self will thank you.
With economic growth looking gloomy and interest rates low, it’s important you make your money work harder for you in a diversified investment portfolio. By spreading your money across investments, asset classes and geographies, you hope to offset any losses with gains made elsewhere in your portfolio.