Election run-in set to be marked by further living standards stagnation, despite improving economic backdrop and £90 billion savings income boost

Typical working-age households are on track for a year of income stagnation in the run-up to the next election, and poorer families are set for further income falls, as tax rises, the end of cost-of-living payments and higher housing costs offset an improving economic outlook, according to new Resolution Foundation research published today (Wednesday).

The Foundation’s latest Living Standards Outlook brings together forecasts on pay, jobs, housing costs, tax and benefit changes and other economic trends to examine what lies ahead for the living standards of different groups in the run-in to the next General Election.

The good news is that key aspects of the UK’s economic outlook are improving. Inflation has started falling from its October 2022 peak of 11.1 per cent, and could be below 3 per cent by the time of the next General Election. Average earnings are now growing faster than prices, while the Bank of England’s interest rate rising cycle is likely approaching its end.

The bad news is that many economic headwinds remain. Around half of the £17 billion of higher annual mortgage costs that rising interest rates have brought about is yet to be passed on to households. Those remortgaging next year could see their annual payments rise by around £3,000.

The Government’s cost of living payments are also due to end after this winter, while some of the gains from stronger pay growth will be swallowed by higher taxes. Inflation-adjusted gross pay is set to rise by 2.9 per cent over the course of the parliament (2019-20 to 2024-25), but frozen tax thresholds mean that for the typical employee, post-tax pay will rise by just 0.6 per cent in real terms over this period.

Taking all these trends together, the Foundation’s analysis finds that real disposable incomes for typical working-age households are set for zero growth next year (2024-25), having fallen by 4 per cent over the past two years (2021-22 to 2023-24).

The outlook is even worse for low-to-middle income households, with the poorest half on track to see another disposable income fall of around 1 per cent. A further 300,000 people are set to fall into absolute poverty.

These projected income falls would happen even if working-age benefits were uprated next April by this September’s inflation rate, as is usual, which is expected to be around 7 per cent. The Foundation warns that, should the Government renege on the usual uprating measure, the scale of income falls for millions of families will be even greater.

This is not an ideal living standards backdrop to a General Election. Since the 1960s, there is no example of a government retaining a majority with such weak income growth.

The report also shows that the current parliamentary term is on track to be by far the worst for living standards growth since at least the 1950s. Typical working age household incomes are on course to be 4 per cent lower in 2024-25 than they were in 2019-20 – considerably worse than then the 1 per cent income fall recorded between 2005-06 and 2010-11. Never in living memory have families got so much poorer over the course of a parliament.

The Foundation notes, however, that there are also some big winners during the election year from the sharp rise in interest rates.

Gross income from interest on savings is set to rise to £90 billion next year, equivalent to over £3,000 per household on average, up from just £5 billion in 2021-22 when interest rates were at historic lows.

This huge savings boom will affect groups very differently. Households aged 65-74 are set to gain six times as much, on average, as those aged 35 and under, while two-thirds of the entire windfall next year will accrue to the tenth of households with the most savings – receiving £20,000 each on average – while the half of households with the lowest savings will receive just £100.

Adam Corlett, Principal Economist at the Resolution Foundation, said:

“The good news for the Government is that Britain’s economic outlook is improving as it enters a crucial election year. The bad news is that the living standards outlook is still dire, with overall stagnation and further income falls on the way for less well-off households.

“Rapidly rising interest rates mean that families remortgaging next year could see their bills rise by £3,000, while richer and older households are set to take the lion’s share of Britain’s £90 billion savings income boom.

“The worst of the cost of living crisis may be behind us, but except for those with significant savings, it is stagnant living standards rather than boomtime Britain that the immediate future has in store.”