Issue date
13 Mar 2015

13 March 2015

A new report published today (Friday) by the TUC, The living standards tax gap: a future risk to the public finances, has found that if wages undershoot expectations during the next parliament to the same extent as they have since 2010, the government will face a further £44bn black hole in its annual budget.

Real wages may have shown a few months of improvement, says the TUC, but that’s only because inflation is so low. Rates of actual pay growth remain far below where the government expected them to be – and it’s higher pay settlements that deliver vital tax revenues for the Exchequer, not falling oil prices.

The government’s economic failure has left us with the longest fall in living standards on modern economic record, says the TUC. This has been bad news not only for pay packets, but also for the Exchequer, with the public finances almost £36bn worse off in 2014/15 because of poor pay growth alone. And the Chancellor is in danger of making the same mistake again.

The TUC report looks at how wages have performed during the current parliament against the expectations of the Office for Budget Responsibility in 2010. It calculates the annual shortfalls in income tax (£22bn) and national insurance revenue (£11bn), and the higher spending on in-work benefits (£2.7bn), that have resulted from wages performing well below expectations.

The total net impact leaves the Treasury £35.7bn worse off this year alone. And that’s before the poor performance of wider tax receipts, or the impacts of tax cuts including increases in the personal allowance are taken into account.

The report also looks forward to the next parliament. It calculates that if earnings growth undershoots the OBR’s forecast by the amount seen in this parliament, the Exchequer will face a further annual shortfall of £44bn by 2020 through lower income tax and national insurance receipts and higher spending on in-work benefits for the low paid.

TUC General Secretary Frances O’Grady said: “We should not be surprised if George Osborne’s plan for an even bigger round of cuts after the election stops the recovery in its tracks – after all, it’s exactly what happened last time.

“The government’s economic plan has failed. We are ending this parliament with real wages worth £50 less a week, and the deficit still here because there’s not enough income tax and national insurance coming in. And the Chancellor has had to spend billions more than he planned on in-work benefits too.

“The last thing we need is a Groundhog Day of austerity, falling wages and deficit failure all over again. We need a plan for growth and a wages-led recovery. It’s time to stop paying the price of failure and to start investing and building for success with decent jobs, decent public services and a proper national investment bank.”

NOTES TO EDITORS:

- The analysis was undertaken for the TUC by IPPR Trading Limited. The full report The living standards tax gap: a future risk to the public finances can be found at https://www.tuc.org.uk/sites/default/files/Thelivingstandardstaxgap.pdf

- The results presented in the report take into account the OBR’s forecasts from December 2014 and the latest public finance statistics, updating and expanding on an earlier TUC analysis on the link between low wage growth and tax receipts.

- All TUC press releases can be found at www.tuc.org.uk

- Follow the TUC on Twitter: @tucnews