Budget 2024: Real pay for young graduates down by over £1,000 in three years
Graduates in their 20s are earning less in real terms than they were before the 2008 financial crash, and are £1,200 worse off than they were at the start of the pandemic on average, despite recent cuts to national insurance.
Chancellor Jeremy Hunt has teased further national insurance cuts in his upcoming budget, following on from the recent decrease announced in his autumn statement.
It could be welcome news to some who have seen their pay packets squeezed over recent years as a result of the cost of living crisis, though economists have warned tax cuts would be unaffordable and would need to be reversed after an election.
People aged between 22 and 29 are earning less in real terms now than they were in 2002.
This is when factoring in inflation, including rising housing and food costs, over the period.
In 2023 prices, the median salary for a graduate in their 20s is £23,990 after paying taxes and student loan – compared with £25,200 in 2020.
Helen Miller, deputy director of the Institute for Fiscal Studies (IFS), said: “This comes in the context of an ongoing, multi-year freeze to personal tax thresholds.
“By 2027 (the last year of the planned freezes), an employee earning £35,000 will be paying about £440 a year more in direct tax overall as a result of all the changes to income tax and NICs since 2021.
“The government has announced significant tax rises. Regardless of what the chancellor announces in the budget, it is highly likely that this will be the largest tax-raising parliament on record.”
Changes to student loan plans
Student loan repayments are set at 9% of income above the salary threshold, which has been frozen at £27,295 since 2021/22.
Still, a recent graduate on an average income is currently paying around £13 a month towards their student loan, so is it really a big deal?
A big factor in the impact of student debt is not just how much people pay back per month, but how much they pay back over their working lives, and when they started university.
Those who went to university on ‘Plan 2’ higher university fees (£9,000 and above from 2012/13) will pay back almost £20,000 more than the previous ‘Plan 1’ cohort in their lifetime, according to estimates by the IFS.
Those who started in the 2023 academic year or later will be eligible for ‘Plan 5’ student loans, which have different repayment terms.
The threshold will increase in line with the Retail Prices Index (a measure of inflation) instead – meaning it will likely increase more slowly than under the previous policy and more graduates will start paying back their debt sooner.
Under the new system, student debt will only be written off after 40 years rather than 30, meaning many will make repayments for longer, potentially into their 60s.
This particularly affects low to middle earners, who are less likely to have paid off their debt after 30 years.
However, under this new system no borrower will repay more than they borrowed (in real RPI terms) – so the highest earners can expect to repay significantly less than if they had started university in 2022 due to the lower interest rate.
On the other hand, people on lower incomes will end up paying back more.
‘A thundercloud waiting to burst’
Dr Farhana Ghaffar, researcher at the University of East Anglia, has been looking at the impact of the post-2012 loan system on students and young people and interviewed graduates who had been through this system to see how it had affected them.
“The idea was generally that a university degree would set you up for life, so it would set you up for a particular kind of life where you’d be able to have a home, start a family,” she said.
But in exchange for this, students are taking on “enormous” amounts of debt, which can have an emotional impact.
“I think sort of five or six years on, they were constantly worried about the debt that was getting bigger and bigger. And obviously they couldn’t do anything about it.
“They’re not at a stage yet where I think we can kind of talk too much about the long-term impacts. But something that was really striking is it was a future worry.
“You know, ‘when I get a mortgage’ or ‘when I start a family’. Someone described it almost as being like a thundercloud, waiting to burst and they just didn’t know when it would happen.”
Anastasia is a Romanian student at the University of Dundee. Her tuition fees are free because she started studying in Scotland while the UK was part of the EU.
Watch Sky News’s coverage of the Budget live from 11am.
English students still have to pay to study in Scotland but students from other EU countries could study for free, as Scottish students do.
Anastasia isn’t sure if she would have gone to university at all if she had to pay fees.
She said: “I’d have to take a few months to think about it. And really, really think about it. I don’t think it’s a decision I could make just like that.
“If there was a way of knowing the payments would be acceptable and manageable – even though I probably won’t have a good job right after I graduate – maybe I would do that but very low chances.
But Anastasia knows that decision too could affect her future prospects, saying “[we are] in a world where everybody expects you to have a diploma for anything”.
“There are so many companies out there that will not give you the job even though you’re fully able to give them a wonderful performance, if you don’t have a diploma.”
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The UK economy unexpectedly shrank in May, even after the worst of Donald Trump’s tariffs were paused, official figures showed.
A standard measure of economic growth, gross domestic product (GDP), contracted 0.1% in May, according to the Office for National Statistics (ONS).
Rather than a fall being anticipated, growth of 0.1% was forecast by economists polled by Reuters as big falls in production and construction were seen.
It followed a 0.3% contraction in April, when Mr Trump announced his country-specific tariffs and sparked a global trade war.
A 90-day pause on these import taxes, which has been extended, allowed more normality to resume.
This was borne out by other figures released by the ONS on Friday.
Exports to the United States rose £300m but “remained relatively low” following a “substantial decrease” in April, the data said.
Overall, there was a “large rise in goods imports and a fall in goods exports”.
A ‘disappointing’ but mixed picture
It’s “disappointing” news, Chancellor Rachel Reeves said. She and the government as a whole have repeatedly said growing the economy was their number one priority.
“I am determined to kickstart economic growth and deliver on that promise”, she added.
But the picture was not all bad.
Growth recorded in March was revised upwards, further indicating that companies invested to prepare for tariffs. Rather than GDP of 0.2%, the ONS said on Friday the figure was actually 0.4%.
It showed businesses moved forward activity to be ready for the extra taxes. Businesses were hit with higher employer national insurance contributions in April.
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The expansion in March means the economy still grew when the three months are looked at together.
While an interest rate cut in August had already been expected, investors upped their bets of a 0.25 percentage point fall in the Bank of England’s base interest rate.
Such a cut would bring down the rate to 4% and make borrowing cheaper.
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Is Britain going bankrupt?
Analysts from economic research firm Pantheon Macro said the data was not as bad as it looked.
“The size of the manufacturing drop looks erratic to us and should partly unwind… There are signs that GDP growth can rebound in June”, said Pantheon’s chief UK economist, Rob Wood.
Why did the economy shrink?
The drops in manufacturing came mostly due to slowed car-making, less oil and gas extraction and the pharmaceutical industry.
The fall was not larger because the services industry – the largest part of the economy – expanded, with law firms and computer programmers having a good month.
It made up for a “very weak” month for retailers, the ONS said.
Monthly Gross Domestic Product (GDP) figures are volatile and, on their own, don’t tell us much.
However, the picture emerging a year since the election of the Labour government is not hugely comforting.
This is a government that promised to turbocharge economic growth, the key to improving livelihoods and the public finances. Instead, the economy is mainly flatlining.
Output shrank in May by 0.1%. That followed a 0.3% drop in April.
Ministers were celebrating a few months ago as data showed the economy grew by 0.7% in the first quarter.
Hangover from artificial growth
However, the subsequent data has shown us that much of that growth was artificial, with businesses racing to get orders out of the door to beat the possible introduction of tariffs. Property transactions were also brought forward to beat stamp duty changes.
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In April, we experienced the hangover as orders and industrial output dropped. Services also struggled as demand for legal and conveyancing services dropped after the stamp duty changes.
Many of those distortions have now been smoothed out, but the manufacturing sector still struggled in May.
Signs of recovery
Manufacturing output fell by 1% in May, but more up-to-date data suggests the sector is recovering.
“We expect both cars and pharma output to improve as the UK-US trade deal comes into force and the volatility unwinds,” economists at Pantheon Macroeconomics said.
Meanwhile, the services sector eked out growth of 0.1%.
A 2.7% month-to-month fall in retail sales suppressed growth in the sector, but that should improve with hot weather likely to boost demand at restaurants and pubs.
Struggles ahead
It is unlikely, however, to massively shift the dial for the economy, the kind of shift the Labour government has promised and needs in order to give it some breathing room against its fiscal rules.
The economy remains fragile, and there are risks and traps lurking around the corner.
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Is Britain going bankrupt?
Concerns that the chancellor, Rachel Reeves, is considering tax hikes could weigh on consumer confidence, at a time when businesses are already scaling back hiring because of national insurance tax hikes.
Inflation is also expected to climb in the second half of the year, further weighing on consumers and businesses.
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