Living-Standards Crunch: Who’s Affected and How?

UK Policy Income and Inequality

Living-Standards Crunch: Who’s Affected and How?

Commentary
Posted on: 10th January 2022
By Multiple Authors
Ian Mulheirn
Executive Director for UK Policy and Chief Economist
James Browne
Head of Work, Income and Inequality Analysis
Christina Palmou
Senior Economist

Household incomes are facing a shock in April. Since the summer, an unprecedented spike in energy costs combined with a surge in wider inflation has caused the outlook for living standards to deteriorate dramatically, especially for lower-income families for whom energy costs make up a significant portion of weekly spending. Wholesale gas prices remain around three times the level they were last summer. Consumers have to date been largely insulated from these effects by the price cap, which has meant that suppliers have been unable to pass the full impact of cost rises on to consumers. So far, instead, a large number of energy suppliers have gone bust. 

But things will come to a head in April, when the price cap is set to jump. Just how high it will go will be decided on 7 February, but Cornwall Insight anticipates the energy bill for a typical household increasing from around £1,300 per year today to around £1,900 from April, with a further rise to over £2,200 expected in the autumn.

Unfortunately, this comes right at the moment when tax rises begin to bite. The chancellor’s £14 billion Health and Social Care Levy raises national insurance contributions (NICs) by 1.25 per cent for employees and a further 1.25 per cent for employers in April. The income tax personal allowance and higher rate threshold will be frozen. And local authorities are expected to raise council tax by up to 3 per cent in the spring, too.

It’s not all bad news for households in April. The National Living Wage will rise by 6.6 per cent, a significant increase for those affected. Cash benefits and other tax thresholds too will be uprated at the start of the new tax year, although the September inflation rate on which those increases will be based was, at 3.1 per cent, considerably lower than the current rate of 5.1 per cent. This means that although benefits will rise in April, they’ll still be about 2 per cent lower in real terms this year than they were last year.

How the Shocks Affect Different Households

This multiplicity of shocks will affect different households in a variety of ways. Overall we’re set to see a significant "overnight" hit to households’ disposable income in April, which is expected to fall by £56 a month on average. This change represents 1 to 2 per cent of net income for most income groups, but substantially more for the poorest.

Figure 1 - "Overnight" impact on disposable income in April by household income decile

'Source: TBI calculations using UKMOD version 2.5.1  UKMOD is maintained, developed and managed by the Centre for Microsimulation and Policy Analysis at the Institute for Social and Economic Research (ISER), University of Essex. The results and their interpretation are the sole responsibility of TBI.' 

If we look at households in the lower-income half, the scale of the shock varies significantly by household type. Notably, working-age people without children, whether or not they are in work, will see the largest overnight losses. Lower-income pensioners and families with children, meanwhile, are likely to see a 1 to 1.5 per cent cut to disposable income as they are protected to a greater degree by the uprating of benefits and state pensions, but they will still see a significant shock.

Figure 2 - Overnight impact on disposable income for different households in the lower half of the income distribution

'Source: TBI calculations using UKMOD version 2.5.1  UKMOD is maintained, developed and managed by the Centre for Microsimulation and Policy Analysis at the Institute for Social and Economic Research (ISER), University of Essex. The results and their interpretation are the sole responsibility of TBI.' 

With the May elections looming and the government's popularity sagging, it seems unlikely that it will be able to simply stand by without taking any action to ameliorate the worst effects of the living-standards shock, especially for the poorest households. Labour has proposed a package of measures to that effect. In the next blog, we’ll explore the options and their distributional effects.

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