Household disposable income will fall by more than seven per cent in real terms over the next two years - the biggest drop since records began in 1956, according to the Office for Budget Responsibility (OBR). It says the the drop of 7.1% in real terms over this year and next year will mean disposable income will still be below pre-pandemic levels by 2028.
The warning came following Chancellor Jeremy Hunt's Budget yesterday, which outlined billions of pounds of tax rises and spending cuts and which was greeted by charities warning that struggling Brits face a "frightening obstacle course just to afford the essentials". The OBR confirmed that the UK has gone into a recession, which it predicts will last "just over a year" - during which time more than half a million people will lose their jobs. It says that unemployment will hit 4.9% by mid-2024, up from 3.5%.
In its report the OBR said: "The UK is being hit by a large terms of trade shock that is set to push inflation to its highest rate in 40 years and drive historic falls in real household disposable income. This inevitably makes households worse off."
It said that this the highest fall in living standards since the Office for National Statistics (ONS) began in 1956-57. The watchdog said it was only the third time that disposable income had fallen for two consecutive fiscal years - the last occasion being in the aftermath of the 2008 global crisis.
Mr Hunt said that his plans would ensure the recession was "shallower", and said around 70,000 jobs would be protected. The Chancellor said that benefits and state pensions would go up by 10.1% in line with inflation.
Rebecca McDonald, chief economist for the Joseph Rowntree Foundation, warned that despite this support families are facing the "worst winter many will remember". She said: "Even with uprating, rates are at historic lows and households facing difficult times are increasingly not able to cover the essentials.
“Through the course of this year we have seen an increase in the number of families who are falling behind with their bills, unable to afford hot meals and going without the essentials they need. The use of one-off payments to help with the cost of living may mitigate some of the looming disaster, but those who narrowly don’t qualify will be hit hard.
“This winter and beyond is still going to be a frightening obstacle course just to afford the essentials."
TUC General Secretary Frances O’Grady said: “We are all paying the price for the last decade of Tory governments, which decimated growth and living standards. Today’s statement shows it will be two decades until real wages recover.
“Millions of key workers across the public sector – who got us through the pandemic – face years of pay misery as departmental budgets are brutally squeezed."
The Chancellor has kept current spending plans until April 2025. But he will unleash cuts of £11.6bn in 2025/26, £23.2bn in 2026/27, and £36.3bn in 2027/28, compared to previous plans.
He will do this by raising revenue spending in real terms only by 1% beyond 2025, and cutting capital spending on big infrastructure projects in real terms by freezing it at the 2025 rate.
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