UK households are set to suffer a 7.1 per cent fall in living standards over the next two years, the largest decline in six decades, according to a new forecast from the Office of Budget Responsibility.
Surging inflation, rising mortgage costs, falling house prices and higher unemployment are battering household finances, with the OBR projecting that real disposable income will fall by 4.3 per cent in 2022-23, the biggest drop since records began in 1956-57.
This would be followed by the second largest fall on record, at 2.8 per cent, in 2023-24, taking the cumulative hit to 7.1 per cent, it said.
Richard Hughes, the OBR’s chair, said this would “wipe out the last eight years of improvement” in living standards, with per-person income remaining more than 1 per cent below its pre-pandemic level even at the end of 2027-28.
The slump comes despite help from the government, principally its effort to shield households from surging energy prices, which will temper the hit to households. Fiscal support will also limit the scale of the recession the UK faces over the next two years while a tight labour market means unemployment is set to rise less than typically in a recession.
The OBR said the government’s energy price guarantee, combined with the various cost of living support packages announced since March, had reduced the per-person fall in household income over the two-year period by about a quarter, while also limiting the economy’s contraction.
However, falls in household consumption will be the biggest factor driving the recession the OBR expects, with its forecasts pointing to a peak-to trough fall in output of 2.1 per cent starting from mid-2022 and lasting for just over a year.
