The Cost of Living Crisis means that average disposable incomes for British households are expected to fall by £2,100 this year representing a 3% drop combined with another 4% decline in 2024, according to a new report.
Using the latest data on how people are coping with the rising cost of living, a living standards analysis by leading economic think tank Resolution Foundation says UK households are only halfway through a two-year crisis.
The two-year squeeze represents a combined 7% drop in spending power in 2023-2024 – which would be the largest single-year fall in income since 1975 and bigger than any declines experienced during the 2008 financial crisis, according to the foundation.
Each income bracket will be impacted differently
The report says only the very richest households will avoid the Cost of Living Crisis and see their incomes rise thanks to rapid growth in investment income. However, because of a tough recession and living standards predicted to remain at pre-Covid levels until at least 2028, middle-class families will be worse off than they were before the pandemic.
Despite positive signs that double-digit inflation will cool during the year ahead, the Foundation warns this benefit will be offset by higher energy bills (energy bills are expected to increase after “the slimming down of government support,” pushing the typical energy bill to rise from £2,000 in 2022-23 to £2,850 in 2023-24), rising personal taxes, and rising mortgage costs. The report also comes amid a rash of strikes by workers demanding pay rises closer to the average inflation rate of 10.7%.
The Bank of England has been raising interest rates – they reached 3.5% in December 2022 – to try and lower the inflation rate below its 2% target. This has led to higher borrowing costs for households, especially on mortgage interest rates.
Although lower-income households will be less affected by higher mortgage bills and interest rates, real incomes among the poorest fifth of households will also fall by 5%, according to the analysis. However, incomes in the top 5% of earners are predicted to rise by 4% between 2021-22 and 2023-24.
Other reports may point to slightly better possibilities
A counter-report published by fullfact.org claims the calculated £2,100-a-year average hit from the crisis, “overstates the impact of inflation, by factoring in both how much prices will rise and how much ‘real wages’—which already allow for inflation—will fall.”
Citing the Bank of England’s latest estimates, the fact-checking organization says when all factors that affect the cost of living are calculated (earnings, benefits, taxes, and price increases), the forecast for “real post-tax labour income” combined average will fall less than the report’s estimate for the 2023-2024 period.
However, in November, the Bank warned that the UK could be facing the longest period of recession since records began during this Cost of Living Crisis– forecasting the nation’s economy could fall into eight consecutive quarters of negative growth if current market expectations prove correct.
The Foundation’s Living Standards Outlook 2023 comes on the heels of last fall’s announcement that the U.K. government’s £55 billion program of tax hikes and spending cuts will result in the country’s sharpest fall in living standards since records began.
Alongside its confirmation that the country had already entered a recession and GDP will contract by 1.4% in 2023, the independent Office for Budget Responsibility (OBR) estimated that real household disposable income — a measure of living standards — is projected to fall by 4.3% in 2022-23.
Even before it became clear that prices were likely to rise much faster than wages, the OBR, the UK’s spending watchdog, was forecasting a squeeze in real incomes this year. We’ll have to wait and see as to whether or not all of that comes to fruition — the rest is still unwritten.
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