New PM to preside over deepest squeeze to living standards in a century

The number of people living in absolute poverty is set to rise by 3 million.

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Real household disposable incomes are on track to fall by 10% over this year and next, the deepest living standards squeeze in a century, while the number of people living in absolute poverty is set to rise by 3 million, according to a new Resolution Foundation report published today.

The report incorporates the Bank of England’s latest economic forecasts and the £30 billion of policy support announced since March to examine household income prospects over the difficult winter ahead, the next two years of the new PM’s time in office, and into the second half of the 2020s.

The research warns that Britain faces a grim winter for living standards, with surging energy expenses underlying the Bank’s prediction of 13% inflation and RF analysis estimating 15% inflation for the lowest 10% of families. Citi projects an inflation peak of 18% since the Bank of England’s August forecast.

This catastrophe will continue through next winter and 2024. Real wages are declining at the highest rate since the Queen’s Silver Jubilee in 1977. By mid-2023, all real pay gain since 2003 will be erased.

This unusual two-decade-long wage slump is a result of high inflation and almost 15 years of economic stagnation, the Foundation believes.

Overall, these predictions suggest that real household discretionary incomes will decrease 5% this year without major government action (2022-23). Inflation will moderate in 2023-24, but incomes will decline by 6% when government income assistance ends.

This 10% salary drop over two years would be the greatest living standards compression in a century.

The lack of an anticipated speedy recovery period would leave average real earnings 7% lower by the end of the current parliament (2024-25) than they were at the start (2019-2020) — the first time Britain has been considerably poorer across a parliamentary term.

Since low-income households are severely hit by the cost-of-living problem, absolute poverty levels are expected to climb.

Absolute poverty will climb by three million over the next two years (from 11 million in 2021-22 to 14 million in 2023-24), while relative child poverty will reach its greatest level (33 percent in 2026-27) since the 1990s.

The Foundation warns that while the economic prognosis is uncertain, the enormity of the living standards crisis facing us — not just over Christmas, but next year and beyond – makes major help from the incoming Prime Minister all but likely.

Support with energy bills during the winter and beyond – through a social tariff, a universal bill cut, a price cap, or extra targeted support – might cost tens of billions of pounds, but would dramatically relieve the burden on low and middle-income households over the next six months.

Maintaining the previous Chancellor’s vow to enhance benefits next year in accordance with September’s inflation rate is crucial to shield poorer people from rising prices.

The pledge may be better if uprating used October’s CPI statistics instead of September’s, since it would account for the anticipated energy price cap hike that will further boost inflation. In times of strong inflation, the government should enhance Universal Credit in April and October.

Improving the UK’s medium-to-long-term economic outlook would greatly enhance living standards, but this must be worked on through a thorough new economic plan, not hoped for.

A 1 percentage point rise in annual real pay growth due to better productivity would enhance the typical family income by 3% by 2026-27 and the income of poorer families by 1%. Scrapping the October NI hike would enhance median salaries by 1% over the same period.

Lalitha Try, Researcher at the Resolution Foundation, 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 three million extra people could fall into absolute poverty.

“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.

“The new Prime Minister also needs to improve Britain’s longer-term outlook, which can only be achieved by a new economic strategy that delivers higher productivity and strong growth.”

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