Regular wages in the UK are finally increasing faster than prices, providing hope for struggling Brits after nearly two years. According to official figures from the Office for National Statistics (ONS), regular pay increased by 7.8% over the three months to August, taking into account the headline Consumer Price Index (CPI) inflation rate. This marks the first time since October 2021 that living standards have improved for Brits amid the Covid recovery. The ONS data, although slightly lower than economists expected, may reduce pressure on the Bank of England to raise interest rates.
However, there are concerns that the UK economy is grinding to a halt as efforts to control prices continue. Vacancies have decreased slightly, and labor market statistics expected next week are likely to show rising unemployment levels. Chancellor Jeremy Hunt has dismissed demands for early tax cuts, despite pressure from Conservative MPs and a report highlighting the burden of tax increases. The Institute for Fiscal Studies (IFS) predicts that by 2027/28, nearly nine million people, or one in six adults, will be subject to higher-rate income taxes due to the government’s £52 billion tax increase. This figure is double the number of people affected when the freeze was introduced in 2021 and nearly triple the figure at the end of the last Labour government.
According to the IFS, the tax increase is equivalent to adding 6p per pound to both the basic and higher rates of income tax or raising the main rate of Value Added Tax (VAT) from 20% to 26%. In previous generations, a much smaller percentage of the population paid higher-rate income tax, with only 1.7 million people affected in 1990-91. The IFS warns that there is no room for tax cuts or spending increases ahead of the general election next year, as the UK finds itself in a “horrible fiscal bind.” It suggests that a net tax rise may be necessary to meet the demand for public spending.
In light of these developments, the Bank of England’s chief economist, Huw Pill, remains concerned about the fast-rising wages and their potential impact on inflation control. He emphasizes the need to continue efforts to bring inflation back to the central bank’s 2% target. Additionally, experts warn that the ongoing conflict between Israel and Hamas in Gaza could affect inflation figures, potentially pushing oil prices above $100 a barrel and impacting fuel consumers.
Overall, while there are positive indications that wages are outpacing inflation in the UK, there are concerns about the state of the economy and the burden of tax increases. The impact of these factors on inflation and public spending will be closely monitored.
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