Britons can expect biggest disposable income fall on record

‘We’ll all end up worse off’: Britons can expect biggest disposable income fall on record, highest inflation in 40 years and ‘horrendous price rises’ thanks to Covid pandemic and Ukraine war

  • Office for Budget Responsibility predicts UK inflation could reach 8.7% in the fourth quarter of this year 
  • Real household disposable incomes are expected to fall by 2.2% in 2022/23 in biggest drop on record
  • Rising energy, goods and food prices helped push inflation to increase 6.2% in 12 months to February

Britain will be hit by a double whammy of sky-high inflation and slower growth as the Ukraine conflict compounds the cost of living crisis – with experts warning of ‘horrendous price rises’ in the coming months.

The Office for Budget Responsibility (OBR) slashed its economic growth outlook as it predicted inflation will now average 7.4 per cent this year and could reach 8.7 per cent in the fourth quarter – the highest level for 40 years.

The UK fiscal watchdog had previously forecast Consumer Prices Index inflation to average 4 per cent in 2022, but it is feared that the Russian invasion will cause more disruption to supply chains and send energy bills even higher.

OBR experts also said real household disposable incomes per person are expected to fall by 2.2 per cent in 2022/23, which would be the largest drop in a single financial year since official records began in 1956/57. 

Chancellor Rishi Sunak warned that the economy and public finances could worsen ‘potentially significantly’ as the full impact of Russia’s invasion of Ukraine and the sanctions against President Vladimir Putin’s regime is felt.

Speaking in his spring statement today, Mr Sunak said the Ukraine war’s ‘most significant impact domestically is on the cost of living’, but revealed growth forecasts have also been slashed for this year and next. 

Also today, official figures revealed rising energy, goods and food prices helped push inflation to increase 6.2 per cent in the 12 months to February – a 30-year high – with that date released hours before Mr Sunak’s speech. 

Meanwhile, issuing a warning that ‘we’ll all end up worse off’ after the Chancellor’s announcement, Hargreaves Lansdown senior personal finance analyst Sarah Coles said: ‘Horrendous price rises are set to hit hard this year. 

Data from Office for National Statistics inflation reports and household expenditure surveys were used to compile the above graphic to explain the cost of living rises – along with figures on fuel costs from The AA and energy prices from Ofgem 

Figures released by the Office for Budget Responsibility today show that real household disposable income will plummet

The Office for Budget Responsibility said unemployment will rise only slightly over the forecast period because of record-high vacancies, lower participation and low redundancies which indicate a tighter labour market than had been expected

The contribution from food and other tradable goods and services inflation has risen significantly and accounts for over a half of inflation, according to this graph from the Office for Budget Responsibility

The Office for Budget Responsibility said the real gross domestic product (GDP) from 2025 is unchanged from its October forecast because it has maintained its assumption that the pandemic has led to ‘economic scarring’ of 2 per cent of GDP

The forecast for gas and oil prices is based on the average gas and oil future prices over the first week of the Russian invasion from February 24 to March 2. These imply prices ‘fall back sharply from their current multi-year highs, but remain elevated’

This graph from a Resolution Foundation report released earlier this month shows that the projected fall in typical real income in 2022/23 is of a scale that has not been seen in Britain outside of recessions

‘The spring statement laid out plans to mitigate the pain of the National Insurance hike for most people, cut tax on fuel, and help some of those on the lowest incomes, but it’s not enough to offset rising prices, so overall there’s a real risk we’ll all end up worse off.

‘Stark figures from the Office for Budget Responsibility released alongside the Budget reveal just how hard price hikes will hit us, with a 2.2 per cent fall in real disposable incomes over the next year, and inflation as high as 8.7 per cent by the end of the year.’

The failure of more than 30 energy suppliers since the beginning of last year will add up to £2.4bn to UK household bills 

The energy suppliers who picked up the pieces when dozens of their rivals collapsed over the last year could be paid £2.4 billion from energy bills.

The charge will be spread across all households in Great Britain, and will likely reach between £2.2 billion and £2.4 billion, regulator Ofgem has revealed.

More than 30 energy suppliers have gone out of business since the beginning of last year.

Industry experts say that some of these companies were poorly run, but others were responsible businesses that were simply not able to withstand the giant rise in wholesale gas prices over the last year.

When a supplier goes out of business, its customers are picked up by one of its rivals, ensuring users are kept on supply. But this comes with costs to the new supplier, which is able to claim back the money from the rest of the market.

The system under which Ofgem transfers customers of collapsed providers over to other firms is called the supplier of last resort (SoLR) regime.

During the Business, Energy and Industrial Strategy Committee’s evidence session held yesterday as part of its inquiry into energy pricing and the future of the energy market Gillian Cooper, the head of energy policy at Citizens Advice, told members: ‘We need to move to a world where the costs of failures are not fully borne by energy bill payers.

‘We have estimated that the costs of all these energy supplier failures is going to cost in excess £2.4 billion. That is about £94 per household.’

Cooper added that the cost does not include the failure of Bulb Energy which collapsed in November.

Rather than its customers being transferred to another firm under the SoLR regime, the company was instead placed in Special Administration and consultancy firm Teneo was appointed to take over its affairs.

Last week, the BEIS Committee published a letter from its Chair, Darren Jones MP, to the Business Secretary Kwasi Kwarteng, asking why Teneo had been banned from buying wholesale gas at hedged prices.

The Chair outlined his concern that this hedging ban will cost the taxpayer at least £1.3bn more than the original £1.7bn estimated cost caused by Bulb’s collapse.

In evidence provided to the Business, Energy and Industrial Strategy Committee, Ofgem said that a vast majority of the billions that companies will claim – 85 per cent – will be to buy enough energy in advance to supply their new customers.

According to Citizens Advice, the charge could add as much as £94 to an average household bill at a time when energy costs are set to go through the roof anyway.

From 1 April the average household whose bills are limited by the price cap will go from paying £1,277 per year to £1,971 per year.

The actual final bill of depends on how much energy is used. The cap limits the cost of electricity to 28p per kilowatt hour (kWh) and the price of gas is capped at 7p.

At current predictions average bills could rise by another £1,000 per year from the beginning of October. Ofgem said that the figure is still ‘subject to significant uncertainty’.

The proportion of the costs that suppliers are claiming to refund customers’ balances from collapsed peers is 3.6 per cent, but this could rise as high as 10 per cent – or around £240million. It said that payments need to be made ‘promptly’ to make sure that the new suppliers are not put in financial difficulty from taking on the customers of their collapsed rivals.

The OBR is now forecasting gross domestic product (GDP) to rise by 3.8 per cent in 2022, down from its 6 per cent previous forecast.

It also downgraded its prediction to 1.8 per cent in 2023 from 2.1 per cent previously while it said GDP would expand by 2.1 per cent in 2024, 1.8 per cent in 2025 and 1.7 per cent in 2026.

The independent economic forecaster said growth will be curtailed as households rein in spending in the face of the worst hit to their finances on record as the Ukraine crisis further disrupts supply chains and sends energy bills soaring.

It said real household disposable incomes will fall by 2.2 per cent per person in 2022-23 – the largest fall since official ONS records began in 1956-57 – and will not recover until 2024, when inflation is finally set to return to the 2 per cent target.

And in a gloomy warning over the Ukraine conflict, it said: ‘The uncertain course of the invasion of Ukraine and international sanctions brings with it the prospect that energy prices could rise further than markets (and therefore our forecasts) currently assume… driving inflation close to double digits and GDP 0.8% lower in the near term.’

Mr Sunak admitted the OBR forecasts do not take into account the full impacts of the war in Ukraine.

He said: ‘We should be prepared for the economy and public finances to worsen – potentially significantly. And the cost of borrowing is continuing to rise.’

The OBR is forecasting interest payments on UK debt to rocket to £83 billion in 2022-23 due to soaring inflation and rising interest rates – the highest on record and almost four times the amount spent in the year before.

Mr Sunak insisted the Treasury will continue to meet all its fiscal rules, with the OBR expecting underlying debt to fall steadily from 83.5 per cent of GDP in 2022-23 to 79.8% in 2026-27.

But the OBR has revised up its forecast for public borrowing to £99.1 billion in 2022-23, up from £83 billion in the October Budget, as rises in debt interest payments will offset higher tax receipts.

It cut its forecast for borrowing in future years, to £50.2 billion in 2023-24, £36.5 billion in 2024-25, £34.8 billion in 2025-26 and £31.6 billion in 2026-27.

Mr Sunak added: ‘By 2024, the OBR currently expect inflation to be back under control, debt falling sustainably, and the economy growing.

‘Our fiscal rules are met with a clear safety margin.’

But the OBR said: ‘Few of these fiscal targets were actually met in the past and there are numerous risks to the outlook at present.

‘Higher energy prices and inflation as a result of a longer war in Ukraine or tougher international sanctions would reduce the Chancellor’s headroom by over £4 billion.’

The Institute for Fiscal Studies has warned workers face paying more tax on earnings in 2025 despite Mr Sunak’s cuts in his statement.

Director Paul Johnson said: ‘If he wants to be remembered as a tax-reforming chancellor, so far he is headed in the wrong direction.

‘The combination of increased NI rates and a reduced income tax rate will make the tax system both less equitable and less efficient.’

The Institute for Fiscal Studies said Chancellor Rishi Sunak has failed to help the ‘very poorest’ despite warnings of the biggest hit to living standards since the 1950s.

After the spring statement, IFS director Paul Johnson said that ‘what really stands out today is what’s missing’. 

‘In the face of what the OBR calls the biggest hit to household finances since comparable records began in 1956-57 he has done nothing more for those dependent on benefits, the very poorest, besides a small amount of extra cash for local authorities to dispense at their discretion,’ Mr Johnson said. 

‘Their benefits will rise by just 3.1 per cent for the coming financial year. Their cost of living could well rise by 10 per cent.’

It comes as rising prices across the board sent UK inflation soaring to a new 30-year high in February as the cost-of-living crisis intensified, according to official figures released today.

The Office for National Statistics said Consumer Prices Index inflation rose to 6.2 per cent in February, up from 5.5 per cent in January and again reaching the highest level since March 1992, when it stood at 7.1 per cent

The Office for National Statistics (ONS) said Consumer Prices Index inflation rose to 6.2 per cent in February, up from 5.5 per cent in January and again reaching the highest level since March 1992, when it stood at 7.1 per cent.

Milk eggs and coffee see big price hikes as UK inflation jumps higher 

UK inflation rocketed higher again in February as Britons faced price hikes across everything from fuel and food to clothing and computer games.

The latest figures from the Office for National Statistics (ONS) revealed that inflation rose across 10 out of the 12 categories that feed into the index, with only communication and education not seeing increases.

Food prices have picked up as the global supply chain disruption and inflation pressures have begun to feed down to the supermarket shelves, with prices rising on a range of staple goods.

This is adding to already steep rises in petrol and energy prices, which have been hitting household finances hard.

But the ONS said the UK is ‘not alone’ in suffering surging costs, with Britain’s measure of CPI broadly in line with that seen in Europe, while it has been rising even faster in America – reaching 8.1% in December.

The ONS said: ‘Many of the current drivers of this inflation are common across countries, with energy and fuel prices being subject to global market conditions and both the US and the UK seeing strong upward price pressure from used cars.’

A detailed look at the ONS data shows that among food prices rising the most, lamb continues to be high on the list, with annual Retail Prices Index (RPI) inflation of 12.4% last month.

Fresh milk prices have also raced higher, up 10.1%, with a 7.4% rise for eggs, while processed vegetables and jams and sugar saw rises of 13% and 12.4% respectively.

In a blow to caffeine lovers, coffee and other hot drinks have seen prices rise by 11.5%, while the cost of tea has increased by 2.8%.

There were also large rises for mineral waters, soft drinks and juices, according to the ONS.

Clothing and footwear was another category that suffered soaring inflation, with a record rise of 8.9% on the CPI measure, and some of the biggest rises seen across womenswear, particularly trousers, dresses, short-sleeved tops and blouses, skirts, jeans and jumpers.

Women’s outerwear was up by an eye-watering 27.7% on the RPI measure, according to the ONS.

The ONS said that clothing prices normally rise between January and February as new stock starts to enter the shops following the new year sales period, but prices fell 1.5% a year earlier as trading was impacted by Covid lockdowns.

Families were also hit with price hikes for toys and games, including both computer games and more traditional toys, with CPI prices overall in the category rising by 4.2%.

Sporting equipment saw a 10.6% jump in CPI prices, while pet food and other related services was another to see costs come under pressure, with inflation of 6.5%.

The rise was higher than expected and comes after prices lifted across food, clothing and footwear and a range of products and services. 

The ONS said inflation rose across 10 out of the 12 categories that feed into the index, with only communication and education not seeing increases.

Experts have warned that prices will rise further still as the Ukraine conflict pushes up already sky-high inflation, adding to painful price rises for energy, fuel, commodities and food. 

The energy price cap rise, the planned reversal of the hospitality VAT cut and increase in National Insurance contributions are set to deepen the crisis facing UK households.

The Bank of England last week raised interest rates for the third time since mid-December, to 0.75 per cent from 0.5 per cent, and warned inflation will now peak at around 8 per cent in April – and could hit double-digits if wholesale energy prices continue to soar amid the Ukraine war. 

In April, Ofgem will hike the energy price cap by 54 per cent and given the impact of Ukraine on gas prices, a further increase is expected in October, possibly by as much as another 50 per cent.

Grant Fitzner, chief economist at the ONS, said: ‘Inflation rose steeply in February as prices increased for a wide range of goods and services, for products as diverse as food to toys and games.

‘Clothing and footwear saw a return to traditional February price rises after last year’s falls when many shops were closed.

‘Furniture and flooring also contributed to the rise in inflation as prices started to recover following new year sales.’

February’s inflation data showed the increase in inflation was led by higher prices of food, clothing, and furniture and household equipment, with Covid lockdowns a year earlier dampening 2021 price rises.

Food and non-alcoholic drinks saw inflation hit 5.1 per cent – its highest level since September 2011 – while there was a record rise across clothing and footwear.

Some of the biggest price rises in recent months have been seen at the fuel pumps, with the ONS revealing that average petrol prices hit a fresh record of 147.6p a litre in February, compared with 120.2p a litre a year earlier.

Average diesel prices were likewise the highest ever recorded last month, at 151.7p a litre.

The data also showed that the Retail Prices Index (RPI) measure of inflation remained at its highest level since March 1991 – hitting 8.2 per cent, up from 7.8 per cent in January.

CPIH, which includes owner-occupiers’ housing costs and is the ONS’s preferred measure of inflation, was 5.5 per cent in February compared with 4.9 per cent in January.

Samuel Tombs at Pantheon Macroeconomics said the Bank of England will likely raise rates to 1% in May to try and rein in rampant inflation.

But he said the economic recovery is ‘likely to slow sharply as households feel the pinch’ later this year.

‘Further rate hikes would increase the risk of a recession and the chances that CPI inflation ultimately would significantly undershoot the 2 per cent target in the medium term,’ he said.

What does Rishi’s National Insurance giveaway mean for YOU? Chancellor increases threshold by £3,000 meaning workers earning less than £12,570 will pay NOTHING – but anyone earning £50,000 or more will still pay MORE

By David Wilcock, Deputy Political Editor For MailOnline and This Is Money 

Rishi Sunak moved to alleviate the pain of a planned National Insurance rise for millions of workers today as he unveiled a massive increase in the threshold at which the tax is paid. 

It means that Britons on lower and medium incomes will end up paying less towards national insurance contributions (NICs) every month, because the rise in the threshold cancels out the effect of the hike in NICs due to come into effect in on 6 April.

Analysis from This is Money shows that the move means that people earning more than £50,000 a year will still pay more in contributions.

Everyone will temporarily start paying more every month for National Insurance in April when the planned rise comes in, before the threshold increase takes effect in July,

For example, someone earning £30,000 a year currently pays £204.25 a month in NICs. From April they will pay £222.15 a month, but in July will start paying £192.46.

An employee earning £100,000 a year currently pays £489.90 a month in NICs. From April this will go up to £580.65 a month, before falling slightly to 548.71 a month in July.

The Chancellor was thought to have been mulling an increase in the salary at which people begin making national insurance contributions (Nics) by a few hundred pounds from £9,568.

But he stunned MPs by increasing it by £3,000 to £12,570, an increase of more than 31 per cent, to bring it into line with the threshold for paying income tax. 

But he rejected pressure from Labour and his own Tory backbenchers to scrap the total  1.25 percent rise in Nics due to come in from next month in the face of rising living costs. 

Mr Sunak told the Commons that the money was needed to help the NHS recover from the ravages of the Covid pandemic. 

The Chancellor was thought to have been mulling an increase in the salary at which people begin making national insurance contributions (Nics) by a few hundred pounds from £9,568.

He said: ‘Our current plan is to increase the NICs threshold this year by £300, I’m not going to do that – I’m going to increase it by the full £3,000, delivering our promise to fully equalise the NICs and income tax thresholds.

How are workers’ NICs rates calculated?  

National insurance contributions are made up of payments deducted from worker’s pay, plus contributions paid by their employer. 

The increase in the threshold announced by the Chancellor today only affects worker payments, not those made by their firm. 

How much you pay depends on how much you earn, but the formula for working out how much is not completely straightforward. 

There are seven different bands that workers fit into: A, B, C, H, J, M and Z. The vast majority are in band A. 

In all bands, workers pay a different amount of national insurance on different parts of their weekly pay packet, depending on how big it is. 

In band A, you pay nothing on the first £184. Then you pay 12 per cent on pay between £184 and  £967. Then anyone earning more than £967 a week pays an additional 2 per cent on any pay above this level.

For example, someone earning £1,000 a week would pay nothing on the first £184, £93.96 at 12 per cent on the earnings between £184.01 and £967, and 66p on the remaining £33 at 2 per cent. This means their total Nics would be £94.62p.

Five of the other bands see workers pay less Nics. They include married and widowed women, all workers older than the state pension age, and those working a second job, where their main job sees them pay the full rate.

‘And not incrementally over many years, but in one go, this year. From this July, people will be able to earn £12,570 a year without paying a single penny of income tax or National Insurance.

‘That is a £6 billion tax cut for 30 million people across the UK. A tax cut for employees worth over £330 a year. The largest increase in a basic rate threshold ever. And the largest single personal tax cut in a decade.’

The Office for Budget Responsibility (OBR) downgraded growth in gross domestic product – a measure of the size of the economy – from the 6 per cent forecast for this year at the time of the Budget in October to just 3.8 per cent.

Next year’s growth forecast has been downgraded from 2.1 per cent to 1.8 per cent.

Inflation hit 6.2 per cent in February, up from 5.5 per cent in January, again reaching the highest level since March 1992, when it stood at 7.1 per cent.

Mr Sunak said inflation was forecast to average 7.4 per cent this year due to ‘disruptions to global supply chains and energy markets, combined with the economic response to Putin’s aggression’.

Labour, branding Sunak the ‘high-tax Chancellor’, had joined some Tory MPs in urging Mr Sunak to scrap the 1.25 percentage point hike to NI, which will hit next month just as energy bills soar when the price cap increases.

The struggle facing households was further laid bare by the ONS figures showing an even higher than expected rise to the Consumer Prices Index (CPI) figure for measuring inflation, as it hit the highest level since March 1992, when it stood at 7.1 per cent.

Fuel prices also hit new record highs, with figures from data firm Experian Catalist suggesting the average cost of a litre of petrol at UK forecourts on Tuesday was £1.67, with diesel at £1.79.

Shadow Chancellor Rachel Reeves accused Sunak of delivering ‘increasingly incredible claims’, telling MPs: ‘Perhaps the Chancellor has been taking inspiration from the characters of Alice in Wonderland – or should I say Alice in Sunak-land, because nothing here is quite as it seems either.

‘It’s the sort of place where a Chancellor celebrates giving people £200 to help them with their spiralling energy bills before explaining he needs it all back.

‘In Sunak-land, the Chancellor claims ‘I believe in lower taxes’ while at the same time as hiking Alice’s national insurance contributions. So Alice asks the Chancellor ‘when did lower taxes mean higher taxes, has down really become the new up?’.

‘The Chancellor follows Humpty Dumpty’s advice and says ‘when I use a word, it means just what I choose it to mean – neither more nor less’.

‘Alice knows that under the Conservatives taxes are at their highest level in decades as a result of the policies of this very same Chancellor. In fact, this Chancellor is the only G7 finance minister to raise taxes on working people during this crucial year of recovery. Curiouser and curiouser.

‘As Alice climbs out of the rabbit hole to leave Sunak-land, she recalls the words of the white rabbit and concludes that perhaps the Chancellor’s reality is just different from yours.’

But Mr Sunak has said that as a result of the increase in national insurance thresholds, 70 per cent of workers will pay less tax, even accounting for the levy.

Responding to Ms Reeves he told the Commons: ‘It is the largest increase in thresholds ever, the biggest personal tax cut in a decade and it is worth £330 for those workers and it means, and this is the part that I don’t know if she has realised because she talked about the levy and making sure that we direct our policy at those who need our help, there’s a reason the independent Institute for Fiscal Studies called this the best way to help low and middle earners through the tax system.

‘That is because 70 per cent of workers will pay less tax, even accounting for the levy.

‘It is more generous than the policy she is advocating and combined with the other tax cuts we have announced today, as I said, this plan represents the biggest cut, the biggest net cut to personal taxes in a quarter of a century.’ 

Christine Cairns, tax partner at PwC, said: ‘While the tax-free personal allowance has steadily risen in recent years to £12,570 in line with long-standing Government policy, the NI threshold has lagged behind, quietly hovering below £10,000, partly because it’s so closely linked with state welfare benefits such as pensions and jobseeker’s allowance. 

‘However, last year’s announced 1.25 per cent increase from April brought NI sharply into focus and having reaffirmed his commitment to the rise, increasing the threshold was one of the only options left to try and soften the blow for those who will feel it most.

‘While it might seem curious to be effectively both increasing and cutting NI at the same time, today’s change is clearly targeted at helping those with the lowest earnings who may already be below the income tax threshold. 

‘The true impact of this cut, as well as of the future decrease of the basic rate tax rate, for middle income earners will need to be assessed against the impact of the freezing of the income tax bands until 2026.’

Shadow Chancellor Rachel Reeves accused Sunak of delivering ‘increasingly incredible claims’, telling MPs: ‘Perhaps the Chancellor has been taking inspiration from the characters of Alice in Wonderland – or should I say Alice in Sunak-land, because nothing here is quite as it seems either.

Tory MP Mark Harper had earlier defended a hike in national insurance as a way to put money into the NHS and social care.

He told Sky News: ‘I can’t comment on the specifics of what was going to be announced today, but I think on the national insurance rise, it’s very clear – we’ve said we’re going to put an extra £12 billion into, first of all, into the health service for backlogs that have arisen because of the pandemic, and then a long-term funding settlement for social care.

‘If you’re going to say you’re against the national insurance rise taking place either this year or in the future, you’ve got to say whether you’re prepared to not put that money into the health service or social care, or come up with some other way to pay for it.’

Asked about tens of billions of extra revenue sitting in the exchequer as money Rishi Sunak could use, Mr Harper said: ‘Well, I think one of the problems is everyone’s looking at the upside points, and there may well be – I haven’t seen the forecast – there may well be extra revenue, but I think people are forgetting there are also extra costs.

‘So, there are cost pressures on public services and, also, we’ve obviously had to borrow a very significant amount of money, rightly in my opinion, to deal with the economic impact of the pandemic, but that means the economy is vulnerable to rising interest rates and inflation, and, we saw yesterday, in very significant debt interest payments. The Chancellor has to be mindful of that when he’s making decisions.’   

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