Prime Minister Rishi Sunak (C), alongside the Chancellor of the Exchequer, Jeremy Hunt, (centre right) holds his first Cabinet meeting on October 26, 2022 in London, England.
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LONDON — As the U.K. government announces a £55 billion ($65.5 billion) program of tax hikes and spending cuts, the country faces its sharpest fall in living standards since records began.
Alongside its confirmation that the country has entered a recession and GDP will contract by 1.4% in 2023, the independent Office for Budget Responsibility (OBR) on Thursday estimated that real household disposable income — a measure of living standards — is projected to fall by 4.3% in 2022-23.
This would be the largest single-year decline since the Office for National Statistics (ONS) began recording in 1956-57, and will be followed by the second-largest fall of 2.8% the following year.
The cumulative decline of 7.1% between 2021-22 and 2023-24 would reduce RHDI to its lowest point since 2013-14, erasing eight years of growth. Average household income per head is only expected to recover its 2018-19 level in 2027-28.
Unemployment is also expected to rise by 505,000 from 3.5% to peak at 4.9% in the third quarter of 2024.
The OBR said the near-term falls would have been worse without the substantial fiscal support offered by the government this year in the form of the energy price guarantee and successive tranches of cost-of-living payments to low-income households.
Nominal wage growth increased in 2022 and is projected to remain high in 2023, but has not been enough to prevent a significant fall in real wages that has inflicted a historic squeeze on household incomes. The OBR projected that real wages will fall by 1.8% in 2022 and 2.2% in 2023 before recovering to grow by an average of 1.3% per year thereafter.
In Thursday's Autumn Statement, Finance Minister Jeremy Hunt announced £30 billion in spending cuts and £25 billion in tax hikes, while raising the government's cap on household energy bills under the Energy Price Guarantee scheme by £500 per year.
The measures included an extra two-year freeze on income tax thresholds and a lowering of the top rate of income tax to £125,140, along with increases to windfall taxes on the profits of energy companies.
The Resolution Foundation — a think-tank focused on improving living standards for those on low and middle incomes — said in a report on Friday that Hunt's measures had piled further pressure on the "squeezed middle," with personal tax rises announced during the next parliamentary period projected to deliver a permanent 3.7% income hit to typical households.
"The OBR's weaker forecast for pay means that real wages are now not expected to return to their 2008 level until 2027. Had wages instead continued to grow at their pre-crisis rate during this unprecedented 19-year pay downturn, they would be £292 a week — or £15,000 a year — higher," the Resolution Foundation report said.
The foundation's Research Director James Smith said Hunt essentially faced a choice of deciding how, as an energy importer during an energy price shock, Britain would become poorer.
"He has decided that households will do so with higher energy bills, higher taxes, and worse public services than previously expected. Whether or not making the choices was tough, the reality of living through the next few years will be," Smith said.
Hunt did announce targeted fiscal support to those on low incomes or means-tested benefits and pensioners, while pensions and benefits will rise in line with September's annual inflation level of 10.1%, an £11 billion spending commitment. These measures are expected to limit the depth of the recession.
"The continued fiscal support to households throughout 2023 provides support to our assessment that the recession is likely to be less shallow than currently anticipated by the Bank of England and the Office for Budget Responsibility," said Raj Badiani, principal economist at S&P Global Market Intelligence.
"Our main concern is that the government's tax calculations are heavily dependent on the higher windfall tax on the profits of oil and gas firms, which is expected to raise GBP14 billion in 2023. History suggests receipts from windfall taxes often disappoint, pointing to lingering risks of fiscal holes and unexpected rise in government borrowing."
Many of the deepest spending cuts were heavily backloaded beyond April 2025, which the Institute for Fiscal Studies said was "probably the right choice" given the potential economic and social costs of an "unnecessarily large up-front fiscal tightening" and the "profound uncertainty" baked into the outlook.
"But delaying all of the difficult decisions until after the next general election does cast doubt on the credibility of these plans," said IFS Director Paul Johnson.
"The tight spending plans post-2025, in particular, may stretch credulity."
Johnson said the chancellor will be hoping that his clear commitment to fiscal responsibility and the independence of the Bank of England, along with the involvement of the OBR and his "less pugilistic approach to economic policy-making" will be enough to "restore the U.K.'s tattered international reputation."