Soaring energy and housing costs mean Labour is on course to preside over the worst parliament for living standards in modern times, a stark analysis warns.
Three weeks ahead of John Healey’s budget, the Joseph Rowntree Foundation said Britain faces a “dire” outlook unless the government takes “bold policy action”.
The JRF predicts that, after housing costs, average household incomes will be between £440 and £770 lower in real terms in 2029-30 than when Labour came to power two years ago.
Even the lower end of that range would mark the biggest decline in living standards since modern records began in 1961, the thinktank said, and come on top of a tight squeeze in the last parliament.
Louise Haigh, the first secretary of state, has been tasked by Andy Burnham to lead the Cabinet Office cross-government taskforces, with two focusing on turning around living standards. One is looking at short-term cost of living measures to help on housing and energy, and the other at big structural interventions such as public control that might alleviate those pressures long term.
Their work will eventually form part of the 10-year plan expected later this autumn, which Burnham began discussions about with cabinet ministers at a Chequers away day this week.
Haigh has repeatedly told officials that there will have to be “trade offs” in order to prioritise alleviating the cost of living and public control.
At the budget, Burnham has promised to offer a “breathing space” to voters and Healey is expected to offer £1bn in additional support to energy consumers; but there are concerns inside government about whether that goes far enough.
Healey is minded to rebuff a call from the energy secretary, Miatta Fahnbulleh, to spend billions more on removing levies from bills altogether. The most likely solution is understood to be increasing the warm homes discount – a £150 discount to energy bills offered to households on certain benefits.
The chancellor is understood to be considering raising this by £100, with the rise funded by taxpayers.
The foundation’s living standards analysis used the Bank of England’s two projections for energy prices – a “central” and an “adverse” scenario.
The thinktank has pointed out that since the Bank set these out in July, real-world events have tracked close to the adverse scenario, with oil prices surging back above $100 a barrel after hostilities resumed in the Middle East.
By driving up the cost of energy, the renewed conflict has also increased expectations that the Bank will raise the base interest rate to tackle resurgent inflation. Markets are now betting on four quarter point increases to 4.75% by the end of next year.
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Borrowing costs for homebuyers have already jumped in response to the resulting turmoil in bond markets – with the average cost of a five year fixed rate mortgage hitting 6% this week for the first time in three years.
Chris Belfield, the chief economist at the JRF, said: “Without bold policy action on living standards, families are set to be poorer than they were a decade ago. This is terrible both for families who are just treading water to get by and the more than 7 million families who are already routinely going without essentials like food and basic toiletries.”
Some forecasts have suggested the typical household dual-fuel bill could leap by 16% to the equivalent of £2,000 a year in the first quarter of next year. Given the scale of the looming squeeze, the foundation has argued for a more ambitious package of measures on energy than Healey appears minded to offer.
It would like to see a baseline level of energy offered to all households at a cheaper price, with those in greater need entitled to more of these cut-price units of gas and electricity.
Other recommendations include making benefits more generous, by relinking local housing allowance to average rents; and increasing universal credit, as the Conservatives did during the Covid pandemic. This could be paid for via changes such as increasing capital gains tax rates to match income tax, it argues.
The JRF analysis of changes in living standards over time differs from those of the Office for Budget Responsibility and other thinktanks such as the Resolution Foundation because of different ways of accounting for housing costs.
Despite Burnham’s promise to correct 40 years of economic missteps, Healey’s budget is expected to be relatively modest, with important decisions on tax and spend delayed until next year. These include when the UK will implement spending 3% of GDP on defence – a target Healey claimed to be committed to when he resigned as defence secretary earlier this year.
In his 28 October statement, the chancellor is expected to focus on filling the gaps in the defence investment plan announced by Keir Starmer’s government in June; and laying out how the Treasury will devolve some income tax revenue to regional mayors.
