How Budget policies changed household incomes across the income distribution

More pounds in people’s pockets?

In her Budget speech in October 2024, Rachel Reeves said she wanted ‘more pounds in people’s pockets’ and ‘to improve living standards’. But when we compare average incomes and the income distribution under a pre-measures scenario, to our post-measures scenario, we find Budget measures have reduced average incomes, but this reduction was progressive, meaning higher-income households seeing greater reductions than lower-income households.

How did Budget policies affect key drivers of changes in living standards?

In our paper showing how economic and employment growth alone will not be enough to reduce poverty levels, we looked at how poverty and the income distribution changed between January 2025 and January 2029 under a series of scenarios drawn mainly from information in the Office for Budget Responsibility’s (OBR) October 2024 Economic and Fiscal Outlook report. In their report, the OBR also look at key economic trends before and after policy measures introduced at the Budget. Here, we build a further scenario, comparing changes in incomes between January 2025 and January 2029 before and after policy measures in the Budget are taken into account.

The policies included by the OBR are listed in section 3 of the October 2024 Economic and Fiscal Outlook report. Over the forecast period, the OBR’s assessment of the cumulative effect of policies on key factors affecting living standards are that they:

• increase inflation, with the biggest effect being a 0.4 percentage point (ppt) increase in 2025 and 2026 due to policies (Chart 2.10)
• increase employment in 2025 and 2026, with the biggest effect being an average of 0.15ppt increase in the employment rate in 2025, before reducing it at the end of the forecast period, with the largest effect being a 0.1ppt reduction in employment in 2029 (Chart 2.12)
• increase nominal earnings growth (before inflation is taken into account) in 2025, by 0.6ppt, before reducing it in later years, with earnings growth being 0.2ppt lower in 2027, 2028 and 2029 (Chart 2.13)
• see Bank of England interest rates fall more slowly, being an average of 0.25ppt higher over the period 2026 to 2029 (Chart 2.1).

In summary, Budget policies are projected to increase inflation and result in interest rates staying higher for longer, which increases mortgage costs, while having a mixed effect on employment and earnings. The fact the Budget resulted in a combination of negative and mixed changes in key drivers means that we would expect the cumulative effect of Budget policies to reduce living standards.

What are the cumulative effects of the policies on living standards?

Comparing the pre- and post-measures scenarios shows the cumulative effect of the Budget policies was to reduce average incomes by around £5 a week or around £250 a year (in January 2025 prices). This varies across the income distribution, with people in the lowest 20% of incomes seeing a reduction of less than £100 a year, and people in the highest 10% of incomes seeing a reduction of over £900 a year. The chart below shows average annual percentage changes in income per year between January 2025 and January 2029, as well as the percentage reduction in incomes in January 2029 made by Budget policies.

The chart shows incomes fall across the whole of the income distribution in both the pre- and post-measures scenarios. Under the post-measures scenario income reductions are larger but more evenly distributed (shown by the orange line being flatter than the blue line. This is also illustrated by the green line, which directly compares incomes in January 2029 under the post-measures scenario with the pre-measures scenario, and shows the incomes of lower-income households are reduced by 0.5% through Budget policies, compared to 0.8% for high-income households.

Conclusion

This analysis shows that the cumulative effect of policies in the Budget was to reduce already falling incomes across the income distribution. Although the specific impact of the Budget was to reduce incomes by a larger fraction for higher-income households, the overall reductions in incomes between January 2025 and January 2029 is for incomes to fall fastest for lower-income households. This is not to comment on the merits or demerits of the Budget policies themselves, indeed as shown in HM Treasury’s ‘Impact on households: distributional analysis to accompany Autumn Budget 2024 and Spending Review 2025’ document which accompanied the Budget, additional spending on public services will overwhelmingly support low- and middle-income families. Rather it shows that further additional targeted policy action is needed to improve living standards, especially for lower-income households, if the Prime Minister’s commitment to ‘higher living standards in every region of the country’ is to be met on an income basis.