Stealth taxes are one of three main reasons that British households are set to suffer near-stagnant disposable income growth in the current decade, the government’s budget watchdog has said. 

Office for Budget Responsibility chief Professor David Miles said that fiscal drag, whereby a freeze on income thresholds pulled more people into higher tax rates as wages grew, was squeezing people’s income. 

Miles told MPs on the Treasury Committee that so-called stealth taxes, which mean the Treasury is getting billions of pounds more than it would have done if thresholds moved up with inflation each, limited improvements in living standards. 

The OBR economist said stealth taxes were one of the three main factors slowing household disposable income growth, behind low GDP per capita figures since the Great Financial Crisis and a recent increase in energy prices. 

Money coming straight out of disposable income

He said a lack of productivity growth had been “unusually low for an extended period now”, adding that GDP per person would be about 30 per cent higher had growth in the UK economy continued at the same pace as it had done before the 2008 crisis. 

Miles then said a sharp increase in oil and gas prices would have a “lasting effect” on living standards over the next three years even if energy costs “unwind” from peaks seen in the last couple of months. 

He added: “And then there’s an ongoing increase in the overall effective tax rate in the UK, and much of that comes because of the freeze on thresholds where people move into higher rates of income tax. 

“It’s increasing the average tax take out of people’s income that comes straight out of disposable income.”

A decade of stealth taxes – and living standards woes

The future of UK living standards partly depended on how much longer a freeze on thresholds would continue for, according to Miles. 

Former Chancellor Jeremy Hunt first announced the freeze at the Spring Budget of 2021, saying it would be re-linked to inflation from 2026. In the statement, Hunt also reduced the additional 45 per cent rate threshold to £125,140. In the year after, Hunt extended the freeze through to April 2028 rather than 2026. 

In her first Budget, Rachel Reeves said she would not extend the freeze beyond 2028 in what was then seen as a surprise announcement. However, Reeves U-turned on the commitment as a further extension to April 2031 was her main revenue-raiser in her bid to fund public services and meet fiscal rules. 

Researchers at the Resolution Foundation said the 2020s would be a “catastrophic” decade for living standards. 

Its research showed that, in the 2020s, real household disposable income was set to rise by just 1.4 per cent. 

This is dwarfed by a 28 per cent rise in the ‘90s, an increase of 18 per cent in the noughties, and 14 per cent in the 2010s.

In his appearance before MPs on Wednesday afternoon, Miles suggested there was no imminent escape for the government as “it’s very difficult to move the dial that much through policy”. 

The economist said the government would have to get “an awful lot of good luck” for living standards forecasts to radically improve, though growth boosts from AI or a dramatic fall in energy costs could improve British families’ fortunes.