Ms Reeves’s decision to ramp up employers’ National Insurance will not help, as it imposes costs on businesses – which will be less likely to hire workers as a result – and on staff, who can expect smaller wage increases as a result of the policy.
As a result, the OBR expects a hit to employment and hours equivalent to losing 50,000 workers from the economy.
“The drag from an ageing population, rising health-related inactivity, and the rise in employer NICs is only partially offset by increases in childcare provision, a rise in the state pension age, and the boost from migrants, who are disproportionately of working age,” it said.
It expects there will be 34.1m people in work in 2028 – around 200,000 lower than it anticipated in March.
Wages and living standards
Workers face two years of stagnant pay as the Chancellor’s raid bears down on living standards.
The OBR said higher pay growth in the near term would be followed by a dip as employers “pass on the NICs rise, rebuild profit margins, and the temporary boost to demand [from higher public spending] fades”.
While real earnings growth – accounting for inflation – is around 2.5pc in 2024, the OBR expects this to fall to “around zero in 2026 and 2027”.
The watchdog also warned that Ms Reeves’s tax rises would put a major dent in living standards. Compared with the OBR’s March forecast, real household disposable income per person – a proxy for living standards – is forecast to be lower by the start of 2029 “as real wage growth slows and taxes increase”.
The OBR blamed “five trends” for the substantial dip during the middle of the decade, including “a substantial part of the employer NICs increase being passed onto real wages; other tax rises in the Budget; non-labour income easing back to medium-term trends, and a rising state pension age dragging on benefit payments.”
The state pension will rise by 4.1pc next April, matching growth in average earnings – under the triple lock, the pension increases by the highest of workers’ pay, inflation or 2.5pc. That will add up to £470 to pensioners’ annual incomes.
Overall pensioner spending, including other support such as housing benefit, will rise from £150.7bn this year to £182.7bn in 2029-30, even including the decision to remove winter fuel payments from those not in receipt of pension credit.
Benefits for those of working age will go up by 1.7pc, matching September’s rate of inflation.
Starmer’s growth target
Sir Keir Starmer will not come close to achieving his goal of boosting economic growth so much that Britain has the fastest growth in GDP per person in the G7, according to the OBR’s forecasts.
It expects GDP per capita – often used as a rough guide to living standards – to grow by 1.4pc next year, slowing to around 1pc by the end of the decade.
That means Britain will never top the rankings, always coming in far behind the US, which the International Monetary Fund expects to achieve much faster growth of around 1.7pc annually. Instead, it will bounce between being the sixth and second best of the seven big rich democracies each year – and remain far behind the US.
Tax burden
The tax burden, which had already risen sharply under the Conservatives to more than 36pc of GDP, is set to climb to new highs. Next year, it will rise to 37.4pc, before climbing to 38.2pc by the end of the decade.
The previous high was 37.2pc in 1948, in the wake of the Second World War.