Typical household disposable incomes for working-age families are on track to fall by 3 per cent this financial year, and by 4 per cent next year, with the two-year cost-of-living squeeze set to leave families £2,100 worse off and only the very richest households seeing their incomes rise, according to new research published today by the Resolution Foundation.
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The Foundation’s annual Living Standards Outlook 2023 uses data from a new YouGov survey of 10,470 adults to assess how people are coping with the cost-of-living crisis this winter, and looks ahead to how the scale and nature of the crisis will evolve in the years ahead.
The report notes that the financial year ahead (2023-24) should be one in which inflation starts to fall rapidly, having spent much of 2022-23 at double digit levels.
However, this welcome trend will be offset by a range of living standards headwinds, from higher energy bills (the slimming down of government support will cause the typical energy bill to rise from £2,000 in 2022-23 to £2,850 in 2023-24 despite falling wholesale prices), to rising personal taxes (threshold freezes will increase tax bills for a middle-income household by around £700 from April), and rising mortgage costs for three million households (with mortgagor households experiencing a 12 per cent income fall over the two-year period).
As a result, typical after-housing-costs incomes for working-age families are set to fall by 3 per cent in 2022-23, and by 4 per cent in 2023-24 – a 7 per cent fall over two years’, worth £2,100 for a typical family.
The scale of this fall is considerably tighter than the post-financial-crisis squeeze (5 per cent between 2009-10 and 2011-12) and, when combined with a weak recovery from 2024 onwards, would leave typical household incomes still below pre-pandemic levels even by 2027-28.
With the crisis only at its halfway stage, the authors warn that millions of families are already struggling to cope.
The report finds that 23 per cent of adults (equivalent to 12 million people in total) said they couldn’t afford to replace or repair major electrical goods (e.g. fridges, washing machines) (up from 8 per cent pre-pandemic), while 11 per cent (equivalent to six million people) said that they were hungry but didn’t eat because of a lack of money in the past month (compared with 5 per cent pre-pandemic).
The authors add that with the crisis currently being driven by the higher cost of essentials like food and energy, lower-income families are finding it hardest to cope.
Among people in the poorest fifth of working families, 32 per cent say they are not confident about their finances as a whole over the next three months (compared to 19 per cent overall), while 34 per cent say their health has been affected by the rising cost of living (compared to 21 per cent overall).
The report shows however that Government support has responded well to the nature of the cost-of-living crisis, by rightly prioritising support at those most in need.
The combination of targeted cost-of-living payments this year and next, along with a 10.1 per cent uprating of benefits next April, mean that – with the exception of the very richest households the scale of income falls will be smaller for poorer than richer households.
Over the course of the two-year squeeze, real incomes among the poorest fifth of households will fall by 4 per cent, compared to 9 per cent for rich households (in the 19th vigintile of the distribution).
The report also shows that while everyone in Britain is affected by the cost-of-living crisis (76 per cent of adults report to have tried cutting back on their overall spending), there is only one group that are set to see typical incomes rise during this period those at the very top.
Rising interest rates this year and next will drive a surge in savings and investment income, much of which will be captured by the richest 5 per cent of households. This means that they alone will see their typical incomes rise (by 4 per cent between 2021-22 and 2023-24).
Finally, the Foundation notes that while the outlook for living standards is bleak, it is also far from certain. For example, further falls in wholesale gas prices could accelerate the fall in inflation, easing the cost-of-living crisis for all households.
It adds that a productivity-driven 1 percentage point annual increase in forecast wage growth would also accelerate the UK’s post-crisis and recovery, and bring forward a return to pre-pandemic disposable income levels to 2025-26.
Lalitha Try, Researcher at the Resolution Foundation, said: “Britain is only at the mid-point of a two-year income squeeze, which is set to leave typical families £2,100 worse off. The crisis is already taking its toll on families, with over six million adults reporting they are going hungry as a result.
“Low-income families have been hit hardest by soaring energy bills and food prices, and are most likely to have seen both their financial circumstances and their health deteriorate. The Government has rightly prioritised them in its crisis response – with support targeted at vulnerable households and tax rises hitting better-off families." ■