Average pay packets on track to be £1,200 lower by 2025 due to Covid, experts warn

Average pay packets are on track to be £1,200 a year lower by 2025 compared to pre-pandemic forecasts, according to a new analysis claiming the coronavirus crisis will prolong Britain’s 15-year squeeze on household incomes.

In a sobering message, the Resolution Foundation warned that despite politicians proclaiming the era of austerity is over, “its legacy will continue for many public services” throughout the course of the current parliament.

It comes after Rishi Sunak, the chancellor, set out the government’s one-year spending review and also highlighted official figures showing the UK economy shrank by 11.3 per cent in 2020 in the worst recession for 300 years.

In its analysis the Resolution Foundation added the pandemic was causing “immense damage” to public finances, with average pay packets on track to be £1,200 lower in 2025 than previously forecast.

It said the combined effect of weaker pay grows and higher unemployment will prolong the UK’s living standards squeeze, suggesting household incomes are on course to grow by just 10 per cent in the 15 years since the start of the financial crash – compared with a 40 per cent growth rate in the 15 years prior to 2008.

The organisation also highlighted Mr Sunak’s omission yesterday on universal credit proposals, with questions remaining over whether the government will extend the increase in payments to claimants when the measure expires in just four months.

The Resolution Foundation’s chief executive Torsten Bell said: “The Covid crisis is causing immense damage to the public finances and permanent damage to family finances too, with pay packets on track to be £1,200 a year lower than pre-pandemic expectations.

“The pandemic is just the latest of three ‘once in a lifetime’ economic shocks the UK experiences in a little over a decade, following the financial crisis and Brexit. The result is an unprecedented 15-year living standards squeeze.

“Yesterday, the chancellor chose to ramp up his Covid spending to £335 billion. But he also quietly dialled down his spending plans beyond the crisis. For all the talk of ending austerity, its legacy will continue for many public services throughout the parliament.”

In order to reduce rapidly growing government debt, the think-tank said the bulk of fiscal consolidation will need to come from tax rises, adding: “While the priority now is to support the economy, the permanent damage to the public finances will mean tax rises in the future.”

But speaking on Thursday, Mr Mr Sunak repeatedly refused to be drawn on the issue in a series of interviews – despite the manifesto Conservative commitment under 12 months ago not to increase income tax, VAT and national insurance.

“It wouldn’t be appropriate for chancellors – any chancellor – to speculate about future tax policy because that has real-world implications,” the chancellor told BBC Breakfast.

“As you would find from any chancellor, they would talk about fiscal policy at a Budget, and obviously we will have one in the spring – we normally have them in the autumn.”