UK households face worst hit to income in a century
Jeremy Hunt‘s tax raid will help to trigger the biggest income squeeze in a century as the cost-of-living crisis becomes “far worse” next year, forecasters have warned.
Households will suffer a 3.8pc slump in real disposable incomes in 2023 because of rising taxes, interest rates and energy bills, according to predictions by the Resolution Foundation think tank. This equates to an £880 drop in earning power and is the biggest fall for a century.
The Resolution Foundation said that typical middle-class households will pay £1,000 more in tax, in part because of measures previously announced by Mr Hunt, the Chancellor. Meanwhile, 2m homeowners will be stung by more expensive mortgages as their fixed rate deals end.
The Government’s energy bill support scheme will also become less generous, pushing up the typical cost of electricity and heating by a record £900.
Real disposable incomes have already fallen by 3.3pc this year, equivalent to £800 per household, analysis by the foundation showed.
However, it predicts that an even larger blow awaits families next year as the cost of living crisis deepens.
Torsten Bell, chief executive of the Resolution Foundation, warned that for living standards “things will get far worse in 2023 before they start to get better”.
He said: “2023 should see the back of double-digit inflation, but it looks set to be a groundhog year for many families whose incomes look set to fall by just as much as they did in 2022.”
Mr Bell said that a rise in benefits and the minimum wage will not be enough to offset the impact of increasing costs.
Most of the pain on taxes will be caused by a freeze on tax thresholds during high inflation, dragging millions of households into higher bands.
Decisions made by Mr Hunt and the Prime Minister, Rishi Sunak, when he was Chancellor, mean that personal tax bills will be almost £1,000 higher for a middle-income household from April 2023, the think tank said.
The impact of the Bank of England pushing up interest rates will also feed through to mortgage holders. The foundation estimates that 2m fixed rate mortgages will be up for renewal in 2023, triggering large increases in monthly repayments.
Average monthly mortgage repayments are set to jump by £3,000 a year for those forced to renew, according to estimates by the Bank of England.
Mr Hunt has previously defended his tax rises as a necessary evil to bring the public finances under control, saying that he would “be asking everyone for sacrifices” and adding: “We’re all going to be paying a bit more tax, I’m afraid.”
Speaking in November, he said: “The way through this is to bring down inflation as quickly as possible, because that is the root cause of your concern, your anger, your frustration, that your pay isn’t going as far as it might.”
The Government is also battling a wave of public sector strikes as nurses, ambulance drivers and border staff demand higher wages, potentially piling even more pressure on the Treasury.
It came as analysis by PwC revealed that the average family owes a record £16,200 in unsecured debt.
Data published by the consultancy and credit broker Totally Money found that roughly nine million adults showed signs of “financial fragility”. The total amount of unsecured debt across all UK households exceeded £400m, the report added.
In the last year, unsecured household debt has grown by more than £1,000, up 7.2pc on a year earlier.
Isabelle Jenkins, leader of financial services at PwC UK, said vulnerable consumers could be “disproportionately affected” by unaffordable lending.
She added: “For consumers who are struggling, they have the option to contact their bank as soon as possible, keeping in mind that talking to your lender will not affect your credit file, and they can support you.”
Simon Westcott, also of PwC, added: “The rising levels of unsecured debt plus UK household’s vulnerability to interest rises could leave consumers overstretched.”
This Article was written by Tom Rees and Tom Haynes and it was first published in the Daily Telegraph in the United Kingdom on 30 December 2022.
