OBR Chief Names Frozen Tax Thresholds a Drag on Incomes
Household disposable income in Britain is set to barely grow this decade. The head of the government's budget watchdog gave MPs a three-part explanation, and one part is the tax system.
Three drags on disposable income
Professor David Miles, chief of the Office for Budget Responsibility, spoke to the Treasury Committee on Wednesday. He named stealth taxes among the three biggest brakes on how fast household disposable income grows.
The other two are weak GDP per person since the financial crisis and a recent rise in energy prices.
Stealth taxes here mean fiscal drag. Income thresholds are frozen while wages grow, so more people move into higher tax rates. Miles said this means the Treasury collects billions of pounds extra compared with thresholds rising in line with inflation.
He also said the effective tax rate across the UK keeps climbing, largely because the threshold freeze pushes people into higher income tax bands.
"It's increasing the average tax take out of people's income that comes straight out of disposable income," he said.
Productivity and energy
Miles described productivity growth as unusually weak for a long time. By his estimate, GDP per person would be about 30 per cent higher had the economy kept growing at its pre-2008 pace.
On energy, he said the sharp rise in oil and gas prices would weigh on living standards for the next three years, even if costs ease from recent peaks.
A freeze that keeps getting longer
Jeremy Hunt introduced the freeze in 2021 (Spring Budget) and promised to tie thresholds back to inflation from 2026. The same statement cut the point where the 45 per cent additional rate starts to £125,140. A year later he extended the freeze to April 2028.
Rachel Reeves promised at her first Budget to leave the freeze alone after 2028. She then went back on it: pushing it to April 2031 turned out to be her biggest source of new revenue, helping pay for public services and stay within her fiscal rules.
Miles said the future of living standards partly depends on how long the freeze lasts.
How the 2020s compare
The Resolution Foundation has said the 2020s will be a severely damaging decade for living standards. Its research shows real household disposable income is set to rise by just 1.4 per cent this decade. The 1990s saw 28 per cent, the 2000s 18 per cent and the 2010s 14 per cent.
Miles suggested there is no imminent escape. Policy has limited power to shift the picture, he told MPs. The government would need "an awful lot of good luck" for forecasts to improve sharply. Faster growth from AI or a steep fall in energy costs could help British families.
Source: City AM