Snap verdict on Rachel Reeves’ Budget exhibits what it’s going to imply for YOUR earnings

Rachel Reeves’ “invest, invest, invest” Budget will boost public services – but families have been warned of short term pain for long term gain.

Overnight analysis of the Chancellor’s landmark announcement found it gives a “welcome boost” to schools, the NHS and the crisis-plagued justice system with the biggest investment drive since the early 1980s. But think-tank the Resolution Foundation also warned that rich and poor face a squeeze on their income in order to pay for it.

On Wednesday Ms Reeves announced £40billion of tax rises in order to help fund over £70billion of public service spending. The NHS saw the biggest increase as ministers strive to drive down huge waiting lists left by the Tories, with a £22.6 billion increase in the day-to-day health budget.

But economists said there is mixed news on earnings. The Resolution Foundation projected disposable income will grow by 0.5% across the current Parliament. This is more than the 0.3% in the final five years under the Tories, but would stll be the worst term for living standards ever under Labour – including during the 2008 financial crisis.

Analysists also said that some Government departments face having to find over £10billion cuts to balance the books. The snap assessment found that Ms Reeves’ raid on employers’ National Insurance contributions – which will raise £25billion – is likely to dampen wage growth, creating another squeeze. And it also warned that if the economy doesn’t grow as hoped, the Chancellor will have to launch more large tax raids in the future.

Mike Brewer, interim chief executive of the Resolution Foundation, said: “Rachel Reeves ’s first ever Budget was never going to be a crowd-pleaser, given the profound and often conflicting challenges she faced, from failing public services to perilous public finances, weak growth and stagnating living standards.

“By prioritising extra spending on public services and investment, the Chancellor is borrowing an extra £32 billion a year by the end of the Parliament, with another £41 billion coming from tax rises too. The short-term effect of these changes will be better funded public services – not just across schools and the NHS – but, critically, also in our justice system. But families are also set for a further squeeze on living standards as the rise in employer National Insurance dampens wage growth.”

He pointed to hopes that the investment boost will make a difference, but said Ms Reeves won’t have much wriggle room if living standards don’t go up. He said: “With Britain finally turning the page on its longstanding failure to invest thanks to a £100 billion boost to public capital spending, the hope is that this short-term pain will eventually turn into a long-term living standards gain. But if it doesn’t, future Budgets won’t be any easier to deliver, especially if further tax rises are needed.”

Welcome boost to public services

The foundation found that the Public Sector Net Investment will average 2.6% over this parliament – the highest five-year average since 1980-81. This will bring the UK in line with other major economies around the world.

The health service will account for 42% of all departmental spending in 2025-26, up from 31 per cent in 2007-08. Health alone accounts for 40% of the overall £35 billion real increase to day-to-day public service spending between 2023-24 and 2025-26.

But there will be an impact on incomes

The Resolution Foundation found the effects of benefit cuts and tax rises will be felt evenly between high, middle and low earners. It said the poorest half of households face a 0.8% drop in their annual income on average, while the richest half face a 0.6% decrease.

But experts pointed out that increases to Capital Gains and Inheritance taxes mean the wealthy face the largest cash impact overall.

Real household disposable income per person is projected to grow by 0.5% a year on average across the Parliament. Although this is stronger than growth during the last Parliament – 0.3% – it would still be the worst term for living standards under a Labour Government. Even between 2005 and 2010, which included the 2008 financial crisis, there was 0.8% annual growth.

Real wages to grow by just £13 a week over past 20 years

The analysis warned that real-terms pay is set to stagnate in the next two or three years.

It found that the combination of higher inflation and weaker growth stemming from increased taxes on employment – on top of the pressures Labour inherited – will make things difficult. The report said real pay is set to stagnate again in the middle of this Parliament.

As a result, it said, by 2028 real wages are expected to have grown by just £13 a week over the past two decades.

Next year’s Budget could be tough

The Foundation said that frontloading public service spending increases into this year could create a “tough climate” in 12 months’ time.

It said: “Setting a spending envelope that increases by just 1.3 per cent a year in day-to-day spending on public services between 2025-26 and 2029-30 implies £10.8 billion of real per person cuts to unprotected departments, sending their funding back to 2015-16 levels.”

It also said that Ms Reeves, who shook up debt rules to give herself more headroom, has ready used it up. The report said: “Even a modest economic downturn could force the Chancellor to come back for more tax rises at a future fiscal event.”