Britain’s leading financial thinktank has warned workers to expect an unprecedented two lost decades of earnings growth and many more years of austerity as a result of the marked slowdown in the economy announced in Philip Hammond’s budget.

The Institute for Fiscal Studies said in its traditional post-budget analysis that forecasts slashing productivity, earnings and growth in every year until 2022 made “pretty grim reading”, and predicted that even by the middle of the next decade, Britain’s public finances would still be in the red.

The Treasury said the reforms and investment announced by the chancellor were designed to build a country “fit for the future”, but opposition parties said the gloomy IFS report undermined the chancellor’s claims.

In its analysis of the budget and the report from the independent Office for Budget Responsibility, the IFS said:

GDP per person will be 3.5% smaller in 2021 than forecast in March 2016. The loss of growth will mean the economy is £65bn smaller in 2021 than previously thought.

Average earnings are on course to be £1,400 a year lower in 2021 than forecast in 2016. That means the recovery in wages will have failed to materialise and average earnings will be below their 2008 level adjusted for inflation.

Borrowing will be £12bn higher in 2021 than was forecast in March.

Despite a spending increase over the next five years, the NHS is facing its tightest funding constraints since the 1980s. Annual spending growth of 4% a year after inflation before the financial crisis has fallen to 1% a year at a time when the NHS is being stretched by an expanding and ageing population.

Paul Johnson, the IFS director, said the OBR’s decision to reduce its growth forecasts by one-quarter over the next five years would delay deficit reduction, limit Hammond’s ability to ease pressure on welfare and public services and harm living standards.

“We are in danger of losing not just one but getting on for two decades of earnings growth,” he said. “We will all have to get used to the idea that steadily rising living standards may be a thing of the increasingly distant past.”

Public services face real-terms spending cuts of up to 40% in decade to 2020 Read more

The nascent recovery in earnings, which were growing through 2014 to the first half of 2016, had been choked off, Johnson said. “That they might still be below their 2008 level in 2022 as the OBR forecasts is truly astonishing. Let’s hope this forecast turns out to be too pessimistic,” he added.

John McDonnell said the IFS analysis “exposed the appalling failure of seven years of this government’s austerity economics and its grim consequences for working people”.

“Seven years of austerity has not only blighted lives and plunged our public services into crisis, it has also trashed productivity growth and dragged down living standards,” the shadow chancellor said.

“This is a government and an economic policy that has completely failed by any conventional standard; they can serve no further purpose in office.”

The Liberal Democrats said the chancellor was bringing down the public spending deficit by “balancing the books on the backs of the poorest”.

Although Hammond announced extra money for the NHS and scrapped stamp duty for first-time housebuyers in his budget, the package was overshadowed by the OBR’s announcement that the economy would never recover from the damage caused by the financial crisis and its aftermath. It put long-term productivity growth at 1%, down from 2% before the crash.

A Treasury spokesman said an increase in the “national living wage” would be worth an extra £600 a year to low-income workers, while freezing fuel duty for the eighth year in a row and raising the income tax personal threshold would support hard-pressed families.

“The only way to improve living standards in the long term is to improve our productivity, which is why we are investing £30bn across the country in new infrastructure and skills, and delivering an ambitious industrial strategy,” he said.



Q&A What is productivity and why does it matter? Show Hide Productivity is an economic measure of the efficiency of a workforce. It typically measures the level of output per hour of work, or per worker. A more productive workforce signals stronger growth and healthier public finances. Productivity gains are vital to economic prosperity because it signals that more is being achieved by workers in less time. Gains are typically achieved through advances in technology and increased skill levels within a workforce. In the UK, productivity growth has stalled since the financial crisis, putting it behind international rivals. The UK ranks fifth out of G7 leading industrial nations, with Canada and Japan having weaker levels of productivity. Germany is the most productive nation per hour, while the US is top for output per worker. Weak productivity is problematic because it signals weaker economic growth, therefore eroding the public finances. Without an improvement in productivity, economies miss out on increases in wages and living standards, putting further pressure on the welfare system and depressing tax receipts. Some industries are more productive than others. In the UK, manufacturing firms are among the most efficient, whereas the services sector operate at below average productivity. Photograph: Bloomberg

Johnson said that despite the extra cash for the NHS, the government’s main austerity plans were still in place.

“This is not the end of austerity. It is not even nearly the end of austerity. There are still nearly £12bn of welfare cuts to work through the system, while day-to-day public services spending is still due to be 3.6% lower in 2022-23 than it is today,” he said.

Hammond appeared to have satisfied his Conservative colleagues by avoiding politically controversial measures that then have to be unpicked, as in March, when his planned increase in national insurance contributions for self-employed people was ditched within a week. One senior Tory said: “It seems fine. It’s not unravelled, which is a win at the moment. We plough on.”

The chancellor held scores of face-to-face meetings with Tory MPs in the run-up to the budget on Wednesday, to allow them to voice their concerns, and was well-received at the 1922 Committee of backbenchers afterwards.

The former permanent secretary to the Treasury, Nick Macpherson, said: “There are some perfectly sensible policies in this budget. The sad thing is they will have very little impact because they are so small.

“It’s a perfectly reasonable political choice – you’ve got to fill up a budget speech, and there’s always that choice between one big measure and spreading your largesse rather more thinly, and that is what the chancellor has done. It makes perfect sense in political terms, perhaps less sense in economic terms.”

Macpherson, who ran the Treasury until last year, added that abolishing stamp duty was best understood as a sweetener for Conservative voters. “I wouldn’t get too hung up on the impact on transactions and first-time buyers: this is a relieving tax on the government’s core supporters,” he said.

“The vast majority of young people can’t afford to buy any house and probably won’t for many years to come, but the proportion of the population who can – no doubt with the help of their parents – stump up the odd £250,000-300,000, is the sweet spot of Tory middle England. So people who claim it’s bad value for money get it slightly wrong. It’s all about shoring up political support.”