Budget sets out OBR forecast of falling living standards

The Office for Budget Responsibility's Budget forecast shows living standards will fall this year and next and will not return to pre-pandemic levels until the back end of the decade, according to the Resolution Foundation¹. The Resolution Foundation set out its reading of the figures on 24 March 2023¹.

The immediate drivers identified are soaring energy bills and double-digit inflation, which the Resolution Foundation says affect everyone and lower-income families most of all¹. It adds that a later phase of the squeeze comes from rising interest rates, which it says are doing a lot of the work of crushing living standards¹.

The effect differs sharply by housing tenure. Mortgagors, described as the highest income group, are set for the biggest income falls: 8 per cent, or £2,900, on average over this year and next¹. The Resolution Foundation calls this a big turnaround from the living standards windfalls of falling interest rates in the 2010s¹.

Renters' incomes are set to be flat or even grow slightly over the same period¹. The Resolution Foundation says this is because growth in private and social rents, while high by recent standards, remains well below inflation, meaning rents are falling in real terms¹.

On rents, the Resolution Foundation gives growth of 4.7 per cent for private rents and 7 per cent for social rents in England from April¹.

Separately, the Resolution Foundation notes that the ECB, Fed and Bank of England all raised rates in the week to 24 March 2023¹. It cites UK house price data showing the first two months of price falls came through in December and January, and an IMF rule of thumb that every 1 percentage point increase in rates translates into 2 percentage points lower house prices¹.

The Resolution Foundation also reports on a Fabian Society report proposing earnings-related income insurance, noting that basic unemployment benefits replace just 12 per cent of average earnings, with a cost estimated at £9 billion and time-limited support such as six months for the unemployed¹. It cites a study finding the Health in Pregnancy Grant, a universal £190 cash transfer to pregnant mothers from 2009 to 2011, boosted birth weight by 8 to 12 grams and reduced premature births by 9 to 11 per cent¹.

Why it matters for households

The forecast covers the whole of the UK. For households with a mortgage, the Resolution Foundation's reading is that this group faces the largest income falls of any tenure, averaging 8 per cent or £2,900 over this year and next¹. That reflects higher interest rates feeding through to mortgage costs, in contrast to the 2010s when falling rates boosted this group's finances¹.

For renters, the picture is different: incomes are expected to be flat or slightly higher, because rent growth of 4.7 per cent for private rents and 7 per cent for social rents in England from April is below the rate of inflation¹. That means rents are falling in real terms even as they rise in cash terms¹.

The wider forecast is that living standards fall this year and next and do not recover to pre-pandemic levels until the back end of the decade¹. The Resolution Foundation describes the distribution of the cost-of-living crisis as getting more complicated, while calling the big picture a disaster for Britain¹. Further detail on how these pressures interact with pay is set out in the guide to the National Living Wage and the real Living Wage, and wider coverage sits in the rates and economy hub.

What happens next

The social rent increase of 7 per cent in England takes effect from April 2023¹. The Resolution Foundation's commentary was published on 24 March 2023, after the Budget and after the ECB, Fed and Bank of England rate decisions that week¹. No further dates for the OBR forecast or for the income insurance proposals are given in the material¹.