As the next General Election approaches, likely sometime next year, households across the country face more financial struggles. This is despite the economy showing signs of improvement, and a massive £90 billion savings income boost awaits. The Resolution Foundation has undertaken research to explore what lies ahead for different groups of people.
The good news: economic improvement
While challenges abound, there are rays of hope on the economic horizon. Key indicators are starting to look up. Inflation, which hit a high of 11.1% in October 2022, is on a downward path, and could dip below 3% by the next election. Average earnings are outpacing rising prices, and the Bank of England’s interest rate hikes appear to be slowing down.
The challenges: lingering economic headwinds
However, several hurdles remain. About half of the £17 billion increase in annual mortgage costs due to rising interest rates have not yet affected households. For those considering remortgaging next year, annual payments could surge by around £3,000.
The government’s cost-of-living payments to help those on benefits are also set to end after this winter. Any financial benefit from increased pay will be offset by higher taxes. Inflation-adjusted gross pay is projected to rise by 2.9% over the course of this parliament (2019-20 to 2024/25). Still, frozen tax thresholds mean that for the typical worker, post-tax pay will increase by just over half a percent in real terms over this period.
The outlook: income stagnation
Considering these factors, the Resolution Foundation’s analysis predicts that real disposable incomes for typical working-age households will remain stagnant next year (2024-25). This comes after a 4% decline over the past two years (2021-22 to 2023-24).
Low-to-middle-income households face an even bleaker outlook, with the poorest half expected to experience another 1% drop in disposable income. This could push an additional 300,000 people into absolute poverty.
These projected income declines are expected even if working-age benefits are increased next April, following the usual inflation rate, expected to be around 7% this September. The Foundation warns that if the government deviates from this customary approach, the income decline for millions of families could be even more severe.
Election ramifications: weak income growth
This backdrop presents a challenging scenario for any government seeking re-election. There has been no example since the 1960s of a government retaining a majority with such weak income growth.
The report also reveals that the current parliamentary term is set to be the worst for living standards growth since at least the 1950s. Typical working-age household incomes are projected to be 4% lower in 2024-25 than they were in 2019-20. This is significantly worse than the 1% income fall recorded between 2005-06 and 2010-11. Families have rarely experienced such a decline in living standards over a parliamentary term.
Savings windfall: winners and losers
Despite these challenges, there are winners amidst the election-year turmoil. Gross income from interest on savings is expected to reach £90 billion next year, equivalent to over £3,000 per household on average. This marks a substantial increase from the £5 billion recorded in 2021-22 when interest rates were at historic lows.
However, this savings windfall will impact different groups differently. Households aged 65-74 are projected to benefit six times more, on average, than those aged 35 and under. Two-thirds of the entire windfall will go to the top 10% 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, shared his thoughts on the situation: “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.”
While the worst of the cost of living crisis may be behind us, for many, it is a future of stagnant living standards that lies ahead, except for those fortunate enough to have significant savings. As the country approaches a critical election year, these economic challenges will undoubtedly shape the political discourse and voter sentiment in the months ahead.
From a press release by the Resolution Foundation