Wage disparity growth linked to return of pre-crisis pay rises, IFS says | Business

A return to pre-crisis pay rises for bankers and company chief executives could explain why wages for Britain’s top 0.1% of earners are rising faster than for the rest of the population, the head of the Institute for Fiscal Studies has said.

Britain’s leading tax and spending thinktank said that this had not been the case for most of the period since 2010.

Speaking after the chancellor’s spring statement on Wednesday, Paul Johnson, director of the IFS, said the reasons behind the trend were unclear, but added: “Whether there are particular shortages in some of those areas I don’t know. Chief exec pay, and pay in the financial sector, maybe that’s returning to where they were pre-crisis.”

There are 31,000 people in the top 0.1% income bracket in Britain, with pay levels worth several hundred thousand pounds, the IFS said. This group accounted for 8% of all PAYE income tax and national insurance receipts in 2017-18, according to the Treasury.

The IFS also said Philip Hammond could have ended austerity earlier than planned if Britain had voted to remain in the EU, while crashing out without a deal would erase his spending power for boosting public services.

It said the chancellor’s fiscal headroom – described by Hammond as a “deal dividend” – could be effectively wiped out under a no-deal Brexit.

The chancellor used the spring statement to say he had accumulated as much as £26.6bn of additional spending power from stronger tax receipts – on the forecasts of the government’s independent economics forecaster, the Office for Budget Responsibility (OBR) – which could be used to boost public services if Brexit passed smoothly.

Johnson said: “It’s not really a deal dividend, it’s if things go as planned.” He added that the forecasts were “predicated on a fairly smooth transition, they’re certainly not predicated on crashing out without a deal”.

The IFS said the UK economy would have been about 2% bigger without the Brexit vote. In those circumstances the deficit would have been smaller still and the fiscal room for manoeuvre greater, Johnson said, meaning that “the end of austerity could already have been rather more decisively with us”.

The thinktank also warned that it could not determine whether austerity was ending and public services moving “decisively upwards after nearly a decade of unprecedented cuts” until the conclusion of the chancellor’s spending review, which will be unveiled alongside the autumn budget later this year.

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However, the IFS warned that several measures were still in place which suggested austerity was continuing, including the government’s freeze on benefits, which has had the impact of costing 10 million families an average of £420 a year.

Matthew Whitaker, chief economist at the independent thinktank the Resolution Foundation, said it was clear from the OBR forecast that the chancellor has the spending power to end austerity. From the OBR’s figures, by 2022-23 he has the headroom to allocate £24.9bn to unprotected Whitehall departments in a move that could raise their share of GDP back to levels seen in 2015-16. He could also afford to spend £10.7bn on reversing welfare cuts.

However, that uses up the £34.9bn the OBR says he has spare in 2022-23. Also spending on welfare and increasing departmental budgets would leave no extra funds for investment or tax cuts, which Hammond says he wants to consider in the spending review he plans from for the summer.

The Resolution Foundation said an increase in inequality in 2018 will get worse in 2019 without a change of course as the benefit freeze in April and increases in council rates of at least 4% were only slightly offset by a rise in the work allowance on universal credit and a freeze on fuel duty. An increase in the personal allowance to £12,500 will also benefit the richest taxpayers.

“Taken together, these five policies boost 2019-20 incomes by an average of £280 for households in the top fifth of the income distribution but reduce them by £100 those in bottom fifth,” it said.

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