Big spike: Reeves tours a manufacturing facility in Driffield, England. The exchequer has been asked to reconsider raising certain taxes, amid warnings that rises in real disposable incomes will not compensate for the slump for the bottom 40% of households. — Reuters
LONDON: Living standards for Britain’s poorest households will take until 2027 to recover from the inflation shock, according to new analysis that underscores the difficulty facing the Labour government to meet its promise to make voters feel better off.
The National Institute of Economic and Social Research (NIESR) warned that predicted rises in real disposable incomes in 2025 and 2026 will not compensate for the recent slump for the bottom 40% of households. For this group, living standards will not return to pre-2022 levels until the end of 2027, the think tank said in forecasts published yesterday.
A protracted recovery in disposable incomes threatens to further erode support for Prime Minister Keir Starmer, who has vowed to raise living standards in every part of the United Kingdom and turbocharge economic growth.
It may stoke political frustrations that have led to Nigel Farage’s populist Reform UK to top some opinion polls a little over seven months after Labour’s landslide victory.
British households had already faced a period of stagnant real wages since the financial crisis and were among the hardest squeezed globally by high inflation, which peaked in the United Kingdom at over 11% in late 2022.
Inflation is expected to pick up again this year, driven by higher energy bills.
“Living standards are rising in aggregate terms, and that is surely welcome after some really tough years,” said Adrian Pabst, deputy director at NIESR.
“But that increase will not compensate for the fall in living standards between 2022 and 2024 if you measure it by equivalent household real disposable income.”
This measure includes housing costs, which once factored in mean “we’re still not really where we were before the spike in inflation”.
NIESR urged Chancellor of the Exchequer Rachel Reeves to reconsider her pledge not to raise certain taxes, as it projected that her headroom against her financial rules has been wiped out.
However, it predicted that extra spending outlined by Reeves at last year’s budget will help gross domestic product growth accelerate to 1.5% this year, double the expansion predicted by the Bank of England (BoE) last week.
It also expects her policies, including another big increase in the minimum wage, will boost worker participation rates as higher pay attracts more into jobs.
“Beyond 2027 the impact of the stimulus fades, and the pressures of crowding out subside, and then business investment recovers, and this drives growth in the end of the forecast period,” said Benjamin Caswell, an economist at NIESR.
The stimulus and strong wage growth mean the BoE is projected to only cut interest rates once more this year. NIESR also expects rates to settle at 4%, higher than the BoE’s recent analysis implied.
Last week the BoE said an aging population will likely drag down the long-run neutral interest rate, as those approaching retirement boost their savings.
NIESR expects the opposite as a global savings glut unwinds from retirees drawing down their pensions. — Bloomberg
