UK poorest households £4,000 a year worse off

By Patrick Barnham

The UK poorest households are around £4,000 per year worse off as a result of Covid-19 and the cost-of-living-crisis.

The shortfall represents around one quarter of their incomes and is driven mostly by low wage growth not offsetting the impact of high food and energy bills along with increased housing costs, according to the latest quarterly outlook of the UK economy by the National Institute of Economic and Social Research (NIESR).

While the crowning of King Charles III heralds the start of the third Carolean era, sluggish growth and high inflation continue to beset the UK economy. We expect, because of these persistent problems, an ongoing fall in real personal disposable income of 0.7 per cent in 2023 and 1.1 per cent in 2024. This will be contingent on the rate at which inflation slows and the level of pay increases.

The National Institute of Economic and Social Research forecast that inflation will remain continually above target, falling gradually from its current double-digit level to reach 5.4 per cent by the end of 2023. With inflation remaining persistently elevated, we anticipate the MPC will opt for a rate rise to 4. 5 per cent tomorrow, with the possibility of a further rise to 4.75 per cent conditional on future inflation developments.

This rate rise, and any prolonged duration of rates at their peak, will greatly increase government debt-interest spending and have a detrimental effect on the public finances.

Despite this, the institute still project that the United Kingdom will avoid a ‘technical recession’ in 2023. We forecast GDP growth of 0.1 per cent in the first quarter of 2023 relative to the fourth quarter of 2022 and a further 0.3 per cent of growth in the second quarter of 2023. It is our conviction that, although the measures in the Chancellor’s Spring Budget were a step in the right direction, they are insufficient to deliver the necessary structural changes to encourage a return of stronger productivity growth. The labour supply shortage and the chronic investment deficit remain concerning issues, which need to be tackled urgently.

To address these issues, the institute recommends:

  • Helping the hardest hit households, with the existing targeted support in the form of the Cost-of-Living Payment to be complemented by appropriate public-sector wage settlements (to reduce the gap with private sector wage growth) and a new energy policy that combines a Variable Price Cap with a Social Tariff Discount.
  • Increasing spending on public investment to around 3 per cent of GDP over the next five years as opposed to letting it fall to 2.2 per cent of GDP. It is our position that a lack of public investment has deepened, and will continue to deepen, the low growth and low productivity traps countrywide as well as exacerbate regional inequalities.
  • Unifying the fragmented funding streams so that the promises around “Levelling Up” can be delivered. We continue to argue for the creation of a National Development Bank endowed with around £50bn worth of finance to support investment projects across regions and sectors.
  • Implementing a ‘post-EPG’ energy policy, combining a Social Tariff with a Variable Price Cap to address future high energy bills. It would involve discounting energy bills for the poorest households with a system where the price of energy rises with usage, which will lower the energy bills for the poorest (who use less energy) while incentivising efficient energy consumption for the more affluent (who use more energy).

Professor Stephen Millard, Deputy Director for Macroeconomic Modelling and Forecasting), said: “Despite recent positive news, we still expect sluggish GDP growth over 2023 and a fall in aggregate real personal disposable income, driven by the persistently high rate of inflation.  This fall in real incomes creates a need for the government to intervene to support those households less able to cope.”

Professor Adrian Pabst, Deputy Director for Public Policy, said: “Low-income households, especially the bottom 20 per cent, bear the brunt of Covid-19 and the cost-of-living crisis. That they are £4,000 worse off now compared with their pre-pandemic living standards underscores the distributional impact of the shocks to the UK economy. It is the role of fiscal policy to cushion the blow for the hardest hit households and structurally disadvantaged regions by combining targeted support on energy bills with a substantial boost to public investment. Reversing decline and reducing inequalities will be a generational task. Now is the time to build more productive capacity and grow national assets so that we fulfil the country’s unrealised potential.”

The full forecast

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