Household incomes set for another grim squeeze as taxes and Middle East crisis add to lost decade, OBR warns

Household incomes are set for another grim squeeze as taxes and the Middle East crisis add to a lost decade.

The Treasury’s OBR watchdog laid bare the challenges facing Britons over the coming years in its forecasts accompanying the Budget. 

The independent body said it anticipated ‘no growth’ in real earnings in 2027 and 2028, while the level will only recover to 0.5 per cent a year by 2030 in a central forecast.

That is partly because firms are seen as gradually passing on Labour’s national insurance hikes to workers, rather than accepting lower profits. 

The picture is also bleak for real household disposable incomes (RHDI) per head, a metric that was explicitly targeted by Keir Starmer.

It is a measure of what is left after taxes and benefits and the effects of inflation.

The picture is bleak for real household disposable incomes (RHDI) per head, which was explicitly targeted by Keir Starmer

 The OBR said this year the boosts from wage growth and benefits were being outweighed by ‘higher prices and taxes on income and wealth’. 

The inflation spike triggered by the Iran war was seen as pushing ‘down on real wage growth, but up on nominal wage growth’. 

‘The latter then weighs on RHDI because frozen income tax thresholds increase the degree to which effective tax rates rise as nominal earnings increase,’ the watchdog said.

The OBR said an expected easing of energy prices should spark a partial recovery in RHDI per person, rising an average of 0.75 per cent a year up to 2030-31.

However, it is still forecast to be worse by then than had been envisaged in March.

The OBR said this was a continuation of the ‘historically weak’ performance since the 2008 credit crunch.  

‘This slowed significantly in the aftermath of the financial crisis, due to lower growth in productivity and real wages,’ the report said. 

‘Growth reached a historic low over the 10 years to 2025-26, averaging just ¼ per cent a year, and we expect it to fall further in the near term. 

‘By 2029-30, our central forecast sees growth over the prior 10 years averaging less than 0.1 per cent a year. 

‘As a result, 10 years on from the onset of the pandemic, RHDI per person would be just 1 per cent higher than its pre-pandemic level.’ 

David Miles of the OBR told a briefing: ‘It’s a pretty grim picture. If you go back to just before Covid… (it) is virtually no growth in per person real household disposable income.’ 

The forecasts were produced by the OBR alongside John Healey’s (pictured) Budget