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Budget will cost average person £300 a year amid low growth, watchdog warns

The Budget will cost the average person £300 a year, the Office for Budget Responsibility (OBR) has calculated as it warned of another half-decade of sluggish growth.

The watchdog said that the measures unveiled by Rachel Reeves would push up economic growth over the next two years – before going into reverse until 2030.

And the OBR also forecast that the Budget would increase inflation and interest rates because of the decision to increase Government borrowing, leading to higher mortgage costs for some borrowers.

Britain’s economy is set to grow by 1.1 per cent this year, 2 per cent next year and 1.8 per cent in 2026. But growth will then fall to 1.5 per cent for the following two years and rise only slightly to 1.6 per cent in 2029.

Inflation will stay above its 2 per cent target until 2029, although it will not return to the extreme level seen in recent years with a peak of 2.6 per cent next year.

Lower growth and higher taxation are expected to lead to lower living standards than would otherwise have been the case, with real household disposable income (RHDI) per person rising more slowly than previously predicted in the coming years.

RHDI, which takes into effect the impact of taxes and benefits – but not the non-financial benefits gained from better or worse public services – currently stands at £22,000 per person.

By 2030 that will have risen to £22,500, according to the OBR – down from the £22,800 that it would have forecast before the impact of the Budget measures.

Ed Cornforth of the National Institute of Economic and Social Research warned that one factor cramping economic growth was the decision to increase national insurance contributions (NICs) paid by businesses. He said: “The increase in employer’s NICs will be particularly harmful to the economy, estimated to decrease real GDP growth by 0.1 percentage points on average over the next five years.

“Although it won’t directly reduce employee incomes, it will likely reduce employment and raise inflationary pressures, impacting real personal disposable income.”

But other economists suggested growth should increase over time as long as the Government’s commitments to boost investment and reform the planning system bear fruit.

Paul Johnson of the Institute for Fiscal Studies said: “The OBR pointed to a short-term sugar rush, as a result of the debt-financed spending splurge, but that turns into a modestly negative impact by the end of the parliament.

“In the longer term, extra investment, planning reform and greater stability should all help to boost growth, and the OBR said as much. They think the Budget will eventually boost output in a sustainable way, but only from 2032.”

Carsten Jung of the left-leaning IPPR think-tank insisted that the OBR was at risk of underestimating the effect that investing more public money into the economy would have on growth.

He said: “Strategic investment has the potential to significantly increase growth, as the recent bumper growth experience in the USA has shown.”

Reeves announced that she was loosening her self-imposed borrowing rules but said she would only use the proceeds to invest in long-term infrastructure projects, rather than financing day-to-day spending.

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