Chancellor urged to scrap planned tax cuts as figures reveal extent to which living standards will be squeezed by rising prices

Philip Hammond is being urged to scrap cuts to inheritance, corporation and income tax in order to plough money into benefits, as figures reveal the extent to which living standards are going to be squeezed by rising inflation.

Analysis by the Resolution Foundation, shared exclusively with the Guardian, shows a “double-whammy” for lower-income working families who the government has said it wants to target.

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It finds that real wages could start falling by the end of the year while the government’s welfare freeze will inflict far more pain than has been predicted, taking £3.6bn more than expected from some of the poorest people in the country by 2020.

Torsten Bell, the thinktank’s director, warns that the pattern of external forecasts since November suggests that the Office for Budget Responsibility could revise up its inflation forecast to 2.6% this year and next. He said the impact on wages could be catastrophic.

The Resolution Foundation figures show inflation rises could result in:

Average earnings in 2020 being only just higher in real terms than those 15 years earlier in 2005-06.



Real pay falling by the end of 2017 as price increases outstrip pay rises.

The government’s benefit freeze raising an extra £1bn a year by 2020, or £3.6bn over the parliament compared with what was expected in the 2016 budget.

Bell said Hammond could consider Wednesday’s budget “a walk in the park” because forecasts on borrowing would be “less grim than the truly awful ones set out a little over three months ago”.

He pointed out that the chancellor would be able to find money to ease social care pressures and soften the blow on business rates for some firms. But he said the impact of inflation must not be ignored, especially if the government was serious about targeting “just about managing” families.

“The effect of a renewed pay squeeze would be broadly felt across the population. But in many ways the worst affected group might be those ‘ordinary working families’ on lower incomes who will face a double whammy of lower pay growth and benefit cuts,” said Bell.

“That’s because the tax credits and other benefits they rely on are frozen for the next three years as part of the government’s attempt to cut the social security bill. Every time inflation rises it increases the size of this cut. If the OBR’s forecast matched that above it would mean that this benefit freeze would amount to a 6.5% real-terms cut over the parliament.”

The group is calling on the chancellor to reverse cuts to universal credit – inherited from the previous Tory administration – that were part of the reason that Iain Duncan Smith resigned as work and pensions secretary.

Bell said the money could be found without undermining public finances by stopping planned reductions to inheritance, corporation and income tax worth billions of pounds because they “overwhelmingly benefit better-off households”.

In contrast, they point out that two-fifths of the benefit freeze losses come from the poorest 20% of households, with many of those affected in work.

The group’s figures show that a couple with one person working, and two children, were going to be £495 worse off each year as a result of the benefit freeze, but will now lose £680 as a result of higher inflation predictions.



For a single parent in work with one child the figure lost has risen from £365 to £500; for a single parent out of work from £300 to £415 and for a single unemployed person from £170 to £235.

A Treasury spokesperson said: “Getting people into work is the best way to sustainably raise living standards, and our welfare reforms are designed to make sure that work always pays. More people are employed than ever before, and living standards are forecast to rise over this parliament.”

They stressed that the government was concerned about the cost of living had taken several steps in order to support families including “cutting taxes for millions of people”, a “significant pay rise” through the national living wage, doubling free childcare for nearly 400,000 working parents and freezing fuel duty.