According to the Resolution Foundation think tank, the budget will bring living standards in the short term as the government looks to boost long-term economic growth.
Chancellor Rachel Reeves’ decision to increase taxation and borrowing to fund public services and investment is a clear departure from the cuts enacted by the previous government, the report said.
But it warned that the budget “has yet to deliver a decisive turnaround on the UK’s record as a ‘stagnant nation'” as prospects for growth and living standards remain weak.
On Wednesday, Reeves announced Labour’s first budget since 2010, with the party returning to power at July’s general election.
“The short-term impact of these changes will be better funding for public services,” said Mike Brewer, interim chief executive of the Resolution Foundation.
He added: “But households’ living standards will also be further squeezed as increases in employer national insurance dampen wage growth.”
The think tank said the new tax and benefit policies would affect everyone and were aimed at improving living standards for low- and middle-income families.
It is calculated that the poorest half of households will see their annual income fall by an average of 0.8%, while the richest half will see their annual income fall by an average of 0.6%.
Wealthier households are expected to be affected the most overall due to changes in capital gains and inheritance taxes.
The foundation expects a combination of an already challenging outlook, weaker growth from higher employment taxes and rising inflation to hit wage gains.
This means that by 2028, real weekly wages will have increased by just £13 over the past 20 years, the report said.
Labour’s general election manifesto pledged not to increase taxes on working people, explicitly ruling out increases in VAT, National Insurance or income tax.
This commitment has been reviewed some claim rise National Insurance rates paid by employers breach this pledge, but the government denies this.
The Resolution Foundation also warned that the decision to bring forward spending on public services to this year and next means the spending review in the spring will be difficult.
Reeves also left himself “relatively little room to grow,” the report said.
The thinktank said the chancellor’s new debt rules allow for more wiggle room, but much of the money has already been spent, meaning even a small recession could force the government to raise taxes further in the future.
“This is not the kind of budget we want to repeat,” Reeves told the BBC on Wednesday.
“This budget needs to cleanse the past and put our public finances back on a stable track,” she said.
Spending on health, education and transport will rise, with NHS funding set to see its biggest increase since 2010 – an extra £22bn for the frontline and an extra £3bn for equipment and buildings.
