Britons will suffer their biggest fall in living standards on record during the next 12 months, the Office for Budget Responsibility (OBR) has predicted.
And the agency warned that living standards may not return to their pre-pandemic level for a further two years as it published its economic forecasts ahead of the Spring Statement.
The OBR data and lack of action on Universal Credit from chancellor Rishi Sunak prompted charities and financial commentators to warn that the lowest earners would be hardest hit.
Rapidly rising inflation, highlighted by figures out today, and expected drops in disposable income and living standards have already caused advisers and insurers to predict a slow or even falling protection market this year.
Today’s OBR forecast that inflation will peak at 7.4% this year is almost double its estimate of 4% from its last update in October.
“With inflation outpacing growth in nominal earnings and net taxes due to rise in April, real living standards are set to fall by 2.2% in 2022-23 – their largest financial year fall on record – and not recover their pre-pandemic level until 2024-25,” it warned.
However, it did note that Sunak’s policy moves offset half the blow to household finances from higher energy and fuel bills and a third of the overall fall in living standards that households would otherwise have faced.
‘Bitter blow’
However, warnings came from several quarters that public pockets will still be hard hit and a lack of increase to Universal Credit means those on support will feel it most.
Hargreaves Lansdown senior personal finance analyst Sarah Coles noted: “People on low incomes have nowhere to go as prices rise, so the decision not to raise Universal Credit will come as a bitter blow.
“The lower your income, the bigger the percentage of it you spend on essentials, and the harder it is to cut costs when prices rise.
“Those on Universal Credit have a nightmare trying to make ends meet as prices rise through the roof and benefits are set to rise just 3.1%.”
Coles noted that instead of boosting Universal Credit, the chancellor offered another £500m through the Household Support Fund which depends on criteria set by local councils.
These concerns were echoed by the Work Foundation which said the Spring Statement was unlikely to support those who need it most during the cost of living crisis.
“While a raising of the NICs threshold is welcome, overall the measures announced today will not provide economic security to the millions struggling to make ends meet in 2022,” it said.
“And the promise of tax cuts to come in 2024 will do little to reassure low income workers who are today already having to make compromises on day to day essentials including food and heating.
“The priority for the Spring Statement should have been ensuring Universal Credit would rise in line with inflation, to protect those most vulnerable to rising food, clothing and energy prices.
“In the absence of this, many more working families are likely to face hardship over the months to come.”
‘Things will get worse before they get better’
Insurers acknowledged that things were likely to get harder before any improvement and that some could face particularly tough decisions next winter.
Andrew Tully, technical director at Canada Life said: “The OBR has forecast average inflation to hit 7.4% this year, implying that things are certainly set to get worse before they get better.
“We can’t say exactly where inflation will ultimately peak, possibly as high as 9%, but the OBR has already forecast that this will lead to the greatest drop in household living standards in any single financial year since ONS records began.
“Inflation is already at a record 30-year high and the longer it continues to remain above the Bank of England’s 2% target will determine our real living standards for years to come.”
Meanwhile, Royal London argued that Sunak faced “difficult decisions” in his approach.
Royal London director of policy and external affairs, Jamie Jenkins, said: “Few would argue with the view that improving growth in the economy and reducing taxes should lead to better living standards over the long term, but it’s a fine balance when people are facing such a dramatic cost of living rise in the short term.
“There were strong calls to defer or cancel the National Insurance increase, but the chancellor has focused instead on reducing the impact for those on the lowest incomes by significantly increasing the level of the earnings threshold at which it applies.
“Whether this proves to be enough will largely depend on whether inflation continues to rise, and to what extent. Many households will be faced with stark choices if high costs persist – or worsen – as we approach next winter.”