A new report from the Resolution Foundation highlights a ‘cost of living catastrophe’ in April when tax and energy rises could see a £1,200 income hit for families.
Families face a typical income hit of around £1,200 a year from April as a result of tax rises and soaring energy bills, according to new Resolution Foundation research.
The Foundation’s latest quarterly Labour Market Outlook says 2022 will be defined as the ‘year of the squeeze’ for family budgets, with inflation set to peak at 6 per cent in Spring 2022 – its highest level since 1992 – and pay packets stagnating as a result.
The report notes that despite talk of bonuses and rising wages in some sectors suffering badly due to skills shortages, real wage growth – the hourly rate of pay adjusted for inflation – was flat in October, almost certainly started falling in November and is unlikely to start growing again until the final quarter of 2022. As a result, real wages are on course to be just 0.1 per cent higher at the end of 2022 than at the start.
By the end of 2024, the Foundation predicts real wages will be £740 a year lower than had the UK’s (already sluggish) pre-pandemic pay growth continued.
The peak of the squeeze will come in April, says the report, which risks being “a cost of living catastrophe” as energy bills and taxes rise steeply overnight. The cap on energy bills is expected to rise by around £500 a year. Coupled with a further £100 rise to recoup the costs associated with energy firm failures, this could mean a typical energy bill rising by around £600 a year, says the Foundation, adding that the rise will fall disproportionately on low-income families as they spend far more of their income on energy.
Higher-income families will instead be disproportionately affected by rising tax bills in April. The average combined impact of the freeze to income tax thresholds and the 1.25 per cent increase in personal National Insurance contributions to pay for health and social care is £600 per household. For families in the top half of the income distribution, the NI rise alone will raise tax bills by £750 on average.
The Foundation adds that the 6.6 per cent rise in the National Living Wage next April should protect the lowest earners from shrinking pay packets, but says the top priority needs to be energy bills. It highlights four options the Government could take, ranging from reducing the size of the energy cap rise to extending the time period over which the costs of supplier failures are recouped.
Torsten Bell, Chief Executive of the Resolution Foundation, said: “2022 will begin with Omicron at the forefront of everyone’s minds. But while the economic impact of this new wave is uncertain, it should at least be short-lived. Instead, 2022 will be defined as the ‘year of the squeeze’.
“The overall picture is likely to be one of prices surging and pay packets stagnating. In fact, real wages have already started falling, and are set to go into next Christmas barely higher than they are now.
“The peak of the squeeze will be in April, as families face a £1,200 income hit from soaring energy bills and tax rises. So large is this overnight cost of living catastrophe that it’s hard to see how the Government avoids stepping in.
“Top of the Government’s New Year resolutions should be addressing April’s energy bills hike, particularly for the poorest households who will be hardest hit by rising gas and electricity bills.”