The UK is facing its biggest drop in spending power in 70 years, as rising living costs eat into people’s wages.
After accounting for rising prices, the government’s independent forecaster predicted that household income would fall by 6% this year and next.
It predicts that living standards will not recover to pre-pandemic levels until 2027.
It came as Chancellor Jeremy Hunt predicted that the economy would contract but avoid recession this year.
Energy and food prices have skyrocketed as a result of the Ukraine conflict and pandemic, putting a strain on household budgets.
Inflation, or the rate at which prices increase, is currently in the double digits.
Budget 2023: A Quick Overview
The Budget’s Implications for You and Your Money
The tax on corporate profits will be raised to 25% beginning next month.
According to the Office for Budget Responsibility, it is expected to more than halve to 2.9% by the end of this year (OBR). However, for the time being, the figure remains extremely high, far exceeding average wages.
The fall in real household disposable income would be “the largest two-year fall in living standards since records began in the 1950s,” according to Richard Hughes, chairman of the OBR.
“We believe households will use some of their savings to help manage the squeeze on living standards, which will support growth in the near term,” he added.
The OBR examines the government’s tax and spending plans in the Budget and forecasts the country’s performance over the next five years.
Previously, the UK was expected to enter a recession at the end of last year and continue to contract throughout this year.
A recession is typically defined as an economy contracting for two consecutive three-month periods – or quarters.
The last time the UK experienced a recession was in 2020, during the height of the coronavirus pandemic.
The OBR now anticipates:
The economy will contract by 0.2% this year but will not enter a recession.
After that, it will grow by 1.8% in 2024, 2.5% in 2025, and 2.1% in 2026.
Chancellor Jeremy Hunt said the predictions from the OBR were “proving the doubters wrong”.
But Labour criticised the announcements made during the Budget as “dressing up stagnation as stability”.
According to Adrian Hanrahan, managing director of West Midlands-based chemicals firm Robinson Brothers, while prices are expected to fall, they are currently very high.
He told the BBC that this is a huge challenge for the company.
“I’d love to think about growth, and we all want to grow,” he said.
“However, the current challenges are dealing with high energy costs, a lack of resources, and labor shortages. Every penny we have is going into manufacturing rather than investing.”
The most pressing issue for Robinson Brothers right now is high energy prices, and Mr Hanrahan was disappointed to hear nothing in the Budget to address this.
“It’s all very well to talk about growth in two or three years. We want the here and now, which was not available from the Budget today.”