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New PM’s term in office on course to be marked by deepest living standards squeeze in a century, and three million more people in absolute poverty

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Real household disposable incomes are on course to fall by 10 per cent 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 three million, highlighting the scale of the task facing the new Prime Minister when they take office on Monday, according to a new Resolution Foundation report published today (Thursday). 

The report – In at the deep end: the living standards crisis facing the new Prime Minister – incorporates the Bank of England’s latest economic forecasts, as well as the £30 billion of policy support announced since March, to examine prospects for household incomes 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 report notes that Britain faces a bleak winter for living standards, with soaring energy bills behind the Bank forecasting inflation to peak at 13 per cent, and RF analysis projecting even higher inflation of 15 per cent for the poorest tenth of households. Worryingly, the outlook has worsened since the Bank of England’s forecast in August, with Citi projecting an inflation peak of 18 per cent.

Furthermore, this living standards crisis will stretch well beyond this winter into next year and 2024. Real earnings, which are already falling at their fastest rate since the Queen’s Silver Jubilee in 1977, are forecast to continue falling until at least mid-2023, by which time all real pay growth since 2003 will have been wiped out.

This unprecedented two-decade-long wage depression is a consequence not just of record inflation today, but of over 15 years of economic stagnation driven primarily by historically weak productivity, says the Foundation.

The overall impact of these forecasts, which show what will happen without further significant interventions from Government, would see real household disposable incomes fall by 5 per cent this year (2022-23). And although inflation will ease in the following year (2023-24), typical incomes are set to fall even further, by 6 per cent, as the one-off government support for incomes comes to an end.

This stark 10 per cent income fall over two years – equivalent to £3,000 for the typical household – would be the deepest living standards squeeze in a century.

The authors add that the lack of a projected rapid recovery period would leave typical real incomes 7 per cent lower at the end of the current parliament (2024-25) than they were at the start (2019-2020) – the first time on record that Britain has got significantly poorer over the course of a parliamentary term.

The Foundation notes with the current cost-of-living crisis being felt hardest by low-income households, absolute poverty levels are set to rise sharply too.

It forecasts absolute poverty to rise by three million over the next two years (from 11 million in 2021-22 to 14 million in 2023-24), while relative child poverty is projected to reach its highest level (33 per cent in 2026-27) since the peaks of the 1990s.

The Foundation says that while the economic outlook is highly uncertain, the sheer scale of the living standards catastrophe awaiting us – not just over Christmas, but into next year and beyond – means that significant support from the new Prime Minister is now all but inevitable.

Support with energy bills over the winter and beyond – either through a social tariff, a universal bill reduction or a price cap, or further targeted support – is likely to cost tens of billions of pounds, but would radically reduce the scale of the squeeze facing low-and-middle income households over the next six months.

Looking ahead, the report notes that maintaining the previous Chancellor’s commitment to raise benefits next year in line with September’s inflation rate is essential to protecting poorer households from the higher cost of essentials.

The commitment could be improved upon if uprating was permanently switched to use October’s CPI figures, rather than September’s, as it would account for the looming energy price cap rise that will further stoke inflation. The Government should also plan to increase Universal Credit every April and October in periods of very high inflation.

Finally, the Foundation says that improving the UK’s medium-to-long-term economic outlook would significantly improve living standards – though this needs to be worked on via a comprehensive new economic strategy, rather than hoped for.

The report shows that a higher productivity-driven 1 percentage point increase to annual real pay growth over the next five years would boost the typical household income by 3 per cent by 2026-27, and poorer households’ income by 1 per cent. By contrast, scrapping the National Insurance increase in October would only boost median incomes by 1 per cent over the same time 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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