If you thought last year was bad ...

13 Jan 2023 Nick Garbutt    Last updated: 13 Jan 2023

Pic: Unsplash

The year 2022 was a disaster for households, especially poorer ones. Sadly 2023 is set to be even worse, according to the highly respected think tank The Resolution Foundation.

It has just published two significant papers: its economic projections for the coming year and beyond and a survey of 10,000 citizens of how they have been impacted by the cost of living crisis to date. Both make for X Certificate reading.

But before we get to the findings it is important to explain exactly why the UK has been so much harder hit than other developed nations like France, Germany, Canada and Australia.

It is because we suffer from a combination of very high inequality which has not come down since the 1980s and the low growth we have experienced for the past 15 years. The consequence is that low and middle income households are having to pay inflated energy prices from much lower incomes than households elsewhere.

If we continue on existing trends the average household in Slovenia will be better off than its UK equivalent by 2024.

So therefore the policy solution is to address both inequality and poor growth. Obvious solutions would be higher taxation on wealth, more generous benefits to address inequality and more investment and training to promote growth. Firms in the UK have reduced their training budgets over the past 20 years and has just 101 robots per 10,000 employees, lower than Slovenia.

In Northern Ireland we need our government back – some of the solutions may be for central government to implement but we still need a growth strategy if we are going to get out of this mess.

And it is a mess.

There is no getting away from the gathering crisis. The Resolution Foundation survey paints a very bleak picture indeed. It describes 2022 as having been “a disaster for living standards” . Inflation reached its highest level in 41 years, and employers, facing a tight labour market, raised pay by its fastest rate since 1991. Yet despite cost of living support of £58 billion median household incomes fell by 3 per cent during the year. This is the biggest annual fall for 100 years.

As a result three-quarters of UK adults say they are trying to cut back on overall spending and, hardly surprising, this is generating concern with 45 per cent of respondents, or 24 million people, “quite worried” or “very worried” about their energy bills over the winter months.

It gets worse 28 per cent (up from 9 per cent pre-pandemic) of adults say that they could not afford to eat balanced meals, and 11 per cent or 6 million adults (up from 5 per cent pre-pandemic) reported being hungry in the past month because they lacked enough money to buy food. 23 per cent of those receiving means-tested or disability benefits are severely food insecure this winter, up from 4 per cent pre-pandemic.

And whilst some go hungry others are racking up debt or else falling behind on bills. In November 2022, 11 per cent of respondents said that their debts had increased moderately or substantially in the past three months, rising to 20 per cent amongst workers in low-income families. And one in 10 people have missed at least one payment of a priority bill over the past three months.

Those figures do not include the  27 per cent of adults who had to use their savings for daily living expenses in the previous four weeks or the 12 per cent of workers in the lowest income quintile report selling or pawning possessions they would have preferred to keep.

So 2022 was a desperately difficult year. Sadly things are set to get worse, according to the Resolution Foundation.

It predicts a fall in income of a typical household of  3 per cent in 2022-23, after housing costs, and 4 per cent in 2023-24. That two year fall is bigger than in the financial crisis.

The overall effect will be to take back incomes to where they were in 2018-19.

The good news is that prices will ease back, with inflation set to drop. Figures show it started to fall off in November and petrol prices have continued to drop. Similarly there are signs that the global supply chain disruptions caused by the pandemic are now easing.

Benefits and the National Living Wage are both to rise by 10 per cent in April. Sadly this will be more that off-set by: 

     – a energy bill rises of £900 as  government support is scaled back;

     – real wages remaining below current levels well into 2024;

     – tax rises amounting to £700 for a typical household; and,

     – around 2 million households moving onto more expensive mortgages costing the average fixed-rate mortgagor household £3,000 a year.

Britain’s wage stagnation has now gone on for  two-decades. The Foundation believes the misery that causes could be compounded by rising unemployment both the Office for Budgetary Responsibility and the Bank of England agree. They expect between 344,000 and 440,000 more people to be out of work by the end of 2023.

Then there’s tax. While wages will be falling for much of 2023, taxes are on the up. From April a typical middle-income household will see their personal tax bills rise by around £700, largely because tax thresholds are being frozen at a time of high inflation. This in turn means increasing personal tax bills from April 2023 by almost £1,000 for a middle-income household.

And whilst higher interest rates are great for savers who tend to be both older and richer than most, that will not be the case for mortgage holders. Next year around 2 million fixed rate mortgages are set to be renewed, exposing them to higher rates in addition a further one million floating rate mortgages will continue to face the impact of any future rises.

The Bank of England estimates that the average fixed-rate mortgagor household renewing in 2023 faces a £3,000 a year increase in interest costs, with total monthly mortgage payments rising from £750 to £1,000.

All in all 2023 is set to be even worse than 2022.  Happy New Year!

 

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