OBR forecasts record fall in living standards for 2022-23

The Office for Budget Responsibility (OBR) forecasts that real household disposable income (RHDI) per person will fall by 4.3 per cent in 2022-23, which it says would be the largest fall since ONS records began in 1956-57¹. The forecast, published in the OBR's November 2022 Economic and fiscal outlook, also projects a 2.8 per cent fall in 2023-24, described as the second largest on record¹.

The OBR says the UK is being hit by a large terms of trade shock that is set to push inflation to its highest rate in 40 years and drive historic falls in real household disposable income¹. It says the 7.1 per cent cumulative fall from 2021-22 to 2023-24 would take RHDI per person to its lowest since 2013-14, and that by 2027-28 it recovers its 2021-22 level but remains over 1 per cent below pre-pandemic levels¹. This would be only the third time since 1956-57 that RHDI per person has fallen for two consecutive fiscal years, with the last such occasion in the aftermath of the global financial crisis¹.

The OBR says the falls would have been greater without fiscal support announced during 2022. Measures announced alongside and since its March 2022 forecast, mainly the energy price guarantee and successive tranches of cost-of-living payments, raise the level of RHDI per person by 4½ per cent in 2022-23 and 2½ per cent in 2023-24 relative to what would otherwise have occurred, a 3½ per cent average boost over the two years¹. The OBR says the two packages reduce the fall in RHDI per person in 2022-23 by half and lower the cumulative fall from 2021-22 to 2023-24 by around a quarter, to 7.1 per cent¹.

The OBR identifies several drivers of its forecast. It says high inflation erodes real incomes, and that because lower-income households spend more of their income on energy, the proportionate hit to them is greater¹. Nominal wage growth is high in 2022 and 2023 but not high enough to prevent real wages from falling significantly¹. Net taxes and benefits reduce RHDI growth in 2022-23, despite cost-of-living payments, reflecting fiscal drag from frozen tax thresholds among other factors; they boost disposable incomes in 2023 but reduce them from 2025 onwards as temporary support is withdrawn and frozen thresholds draw more people into tax and into higher bands¹.

On interest rates, the OBR says higher rates have little net impact on aggregate RHDI because higher mortgage and interest costs are broadly offset by higher interest income on savings, as the stock of household deposits is roughly equal to the stock of debt¹. It expects rate rises to feed through to payments faster than to receipts, reducing RHDI growth by around half a percentage point next year¹. The OBR says the median household has £8,400 in net financial wealth, 28 per cent of dwellings are mortgage owned, and the median household mortgage debt is around £100,000, based on ONS Wealth and Assets Survey data for Great Britain from April 2018 to March 2020¹.

The OBR expects households to spend more of their income on essentials such as energy and food, and forecasts the saving ratio to fall from a peak of 24 per cent in mid-2020 to zero per cent in 2023, settling at around half a per cent from 2025¹. It expects consumption to fall by 2.7 per cent from the second quarter of 2022 to the third quarter of 2023, before recovering in 2024 and 2025 and settling at growth of around 2 per cent a year thereafter¹.

Why it matters for households

The forecast covers the 2022-23 and 2023-24 fiscal years, so the falls in real wages and living standards described apply to incomes over that period. The OBR's measure, RHDI per person, is income after tax and benefits and adjusted for inflation, so a fall means the average person's spending power declines even where cash pay rises¹. The OBR says the energy price guarantee and cost-of-living payments reduce the scale of the fall, but do not prevent it¹.

The effects are uneven. The OBR says lower-income households spend a larger share of income on energy and so face a proportionately greater hit¹. It also says the impact of higher interest rates will be unevenly distributed: mortgage holders face higher payments while savers receive more interest income, and the OBR expects payments to adjust faster than receipts¹. The rates and economy picture also includes the saving ratio falling to zero in 2023, which the OBR links to households drawing on savings to cushion higher prices¹.

What happens next

The OBR's forecasts are projections, not outcomes, and cover fiscal years to 2027-28¹. The OBR says RHDI per person recovers its 2021-22 level by 2027-28 but remains over 1 per cent below pre-pandemic levels¹. It expects consumption to recover from 2024 and settle at around 2 per cent annual growth thereafter¹. The National Living Wage and real Living Wage differ in how they are set, which affects how pay changes feed into the income figures the OBR describes.