Bleak Britain: UK faces longest fall in living standards on record

A pedestrian walks past derelict shops in Hull, United Kingdom. The UK faces its longest fall in living standards since records began 60 years ago. Photo / Bloomberg

Britons were warned they are on course for the longest fall in living standards since records began 60 years ago after the UK's fiscal watchdog took the ax to its outlook for economic growth.

In an analysis of the government's latest budget and accompanying report by the Office for Budget Responsibility, the Resolution Foundation said on Thursday (UK time) that the economy is set to be £42 billion ($81 billion) smaller in 2022 than the OBR predicted in March.

It also calculated wages will not return to their pre-financial crisis levels of 2007 until at least 2025 once inflation is taken into account. Average annual pay is now projected to be £1030 lower in 2022 than the March forecasts and household disposable incomes will fall for an unprecedented 19 straight quarters between 2015 and 2020, according to Resolution.

Britain's Chancellor of the Exchequer Philip Hammond poses with the traditional red dispatch box, outside his official residence 11 Downing Street, before delivering his annual Budget. Photo / AP

The analysis was reinforced by the Institute for Fiscal Studies, which said the OBR's forecasts implied average earnings would be almost 1,400 pounds lower in 2021 than predicted before the 2016 Brexit referendum and still below their 2008 level.

"We are in danger of losing not just one but getting on for two decades of earnings growth," IFS Director Paul Johnson told a briefing in London on Thursday.

The warnings underscore the challenge Chancellor of the Exchequer Philip Hammond faced on Wednesday when he released a budget that left him little room for fiscal manoeuvring as Brexit looms. The OBR slashed its growth forecasts as a result of weak productivity, and Hammond piled further pressure on the budget by pledging extra cash for the health service and abolishing the tax on some housing purchases for first-time buyers.

"Faced with a grim economic backdrop the chancellor will see this budget as a political success," said Torsten Bell, the Resolution Foundation's director. "But that would be cold comfort for Britain's families given the bleak outlook it paints for their living standards."

The group also estimated that the OBR's forecast showed on a 10-year rolling basis that productivity growth will fall to 0.1 per cent by the end of 2017. That makes it the worst decade for productivity since 1812, when Napoleon invaded Russia.

Hammond acknowledged the problem in his Thursday post-Budget interviews. "The way to deliver higher real pay growth is to improve our productivity, there is no other solution," he told the BBC.

"You can't generate high wage growth unless you are being more productive and the way we do that is to invest in and encourage the most productive parts of our economy: The service sector, which is globally competitive, the high-tech businesses which are happening all over the UK."

Hammond disappointed millions of public-sector workers hoping he might end seven years of pay restraint and lift the 1 percent cap on wage increases in place since 2013.

The Treasury is committed to providing extra money for nurses but "given the spending constraints, other public-sector workers should not be holding their breath in anticipation of an inflation-busting, or perhaps even 1 percent-busting pay rise," the IFS's Johnson said.