Households in Britain will see their spending power cut by an average £3,000 by the end of next year unless the new government acts to counter the biggest drop in living standards in at least a century, research has indicated.
Adding to pressure on Boris Johnson’s successor as prime minister to tackle a worsening cost of living crisis, the Resolution Foundation thinktank said soaring energy bills would cut household incomes by 10% and push an extra 3 million people into poverty.
The thinktank said the outlook for living standards was “shocking” and “terrifying”, noting that without beefed-up support from the state, the drop in the typical household’s income would be twice as severe as that in the global financial crisis of the late 2000s and worse than the 8% drop that followed the oil price shock of the mid-1970s.
Lalitha Try, a Resolution Foundation researcher, said: “No responsible government could accept such an outlook, so radical policy action is required to address it. We are going to need an energy support package worth tens of billions of pounds, coupled with increasing benefits next year by October’s inflation rate.”
It came as a separate report warned that a “significant humanitarian crisis with millions of children’s development blighted” is on the way without urgent government support to alleviate fuel poverty.
The report, led by Prof Michael Marmot, director of the UCL Institute of Health Equity (IHE), warned that high fuel costs and rising poverty were damaging health and that growing up in cold homes would have “dangerous consequences” for many children now and into adulthood. Cold homes adversely affect children’s development, and cause and worsen respiratory conditions and mental health problems.
With prices rising faster than wages, the Resolution Foundation said inflation-adjusted average incomes would continue falling until at least the middle of next year – taking real earnings back to their levels of 2003. Living standards were on course to drop by 5% in the current 2022-23 financial year and by a further 6% in 2023-24 – a two-year decline unprecedented even during the hardship suffered during the second world war.
The two-decade-long wage depression was a consequence not just of the present high level of inflation, but of more than 15 years of economic stagnation driven primarily by historically weak productivity, the thinktank added.
Liz Truss, the frontrunner to replace Johnson, has made tax cuts central to her pitch to be prime minister but has not ruled out direct financial support to help people struggling with their energy bills. A package is expected before the price cap is raised to more than £3,500 a year on 1 October.
Inflation, as measured by the consumer prices index, is currently at a 40-year high of 10.1% but the Bank of England expects it to climb above 13% in October. The cost of living outlook has worsened since Threadneedle Street announced its forecasts last month and the US investment bank Citi said inflation could reach 18% by the middle of next year.
Poorer households faced a higher-than-average inflation rate because more of their income was spent on the two items largely responsible for cost of living pressures – food and energy. The thinktank said by October the least well-off 10% of households would face an inflation rate of 15%.
It added that in the absence of a policy shift or a better economic performance, absolute poverty – where income is insufficient to maintain basic living standards – would rise from 17% to 22% of the population by 2024. The jump from 11 million to 14 million would be the sharpest rise on record.
“Furthermore, absolute child poverty is expected to rocket from 23% in 2021-22 to 31% in 2023-24, an increase of 1 million children”, the thinktank said in a report, In at the Deep End, detailing the cost of living challenge facing the new prime minister.
Real incomes were expected to start rising again once inflation fell back during 2023 but would reverse only part of the decline suffered this year and next, the report said. Average household incomes would be 7% lower in 2024 than in 2019 – comfortably the worst performance during any parliament on record.
Try said: “Britain is already experiencing the biggest fall in real pay since 1977, and a tough winter looms as energy bills hit £500 a month. With high inflation likely to stay with us for much of next year, the outlook for living standards is frankly terrifying.
“Typical households are on course to see their real incomes fall by £3,000 over the next two years – the biggest squeeze in at least a century – while 3 million extra people could fall into absolute poverty.”
Johnson, who leaves Downing Street next week, has warned voters the coming months would be “tough” but the Resolution Foundation warned that the cost of living crisis would stretch into 2024, making it vital the UK grappled with the twin long-term challenges of low growth and high inequality.
