Vantage Point: Economic Outlook  

Household incomes to see biggest squeeze in a century

Household incomes to see biggest squeeze in a century

Real household incomes are projected to fall by 10 per cent over the next two years if the incoming prime minister takes no new action - the largest two-year fall in a century.

The analysis by the Resolution Foundation found typical real household incomes fall by £2,800 - at least twice the fall which was seen after the 2008 financial crisis.

It is also worse than the fall in real household incomes seen in the mid-1970s, when they fell by around 8 per cent.

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Some recovery is projected from 2024 onwards, with median non-pensioner income growing by 2 per cent by growth is expected to be weak meaning incomes will be "significantly lower" than they were in 2019.

The analysis said: "Households are set to face a sharp shock this winter: as the energy price outlook has continued to worsen, forecasts made less than a month ago that inflation would peak at 13 per cent now look optimistic.

"So great is the challenge posed by sky-rocketing energy prices that the government’s response will not only determine how successful the first few months of the new PM’s tenure is, but will also shape living standards throughout their premiership."

The Resolution Foundation analysis shows incomes will fall across the distribution but the drop will be more severe for those at the top and those at the bottom.

Some of the highest-earning households could lose around £6,800 - or 12 per cent - from their incomes on average while some of the lowest-earning households could lose around £1,300 - or 14 per cent - on average.

Average real incomes are set to be 7 per cent lower in 2024-25 than in 2019-20, indeed incomes across the distribution are projected to be lower in 2026-27 than in 2016-17 and only marginally above where they were in 2006-07.

The number of people living in absolute poverty is currently projected to rise from 11mn in 2021-22 to 14mn in 2023-24 – a rise from 17 to 21 per cent, including 30 per cent of children.

Meanwhile relative child poverty is projected to reach its highest level since the peaks of the 1990s.