Run-up to general election marked by income stagnation, says think tank

Working-age households are set for a year of income stagnation in the run-up to the next general election, with the current parliamentary term on track to be the worst for living standards growth since at least the 1950s, according to a think tank.

The Resolution Foundation, which is focused on improving living standards for those on low to middle incomes, said that “never in living memory have families got so much poorer over the course of a Parliament”.

Typical, working-age, household incomes are on course to be 4% lower in 2024-25 than they were in 2019-20 – which is considerably worse than the 1% income fall recorded between 2005-06 and 2010-11, researchers said.

The report looked at comparable UK data going back to the middle of the 20th century.

Key aspects of the UK’s economic outlook are improving, with inflation having fallen from its October 2022 peak of 11.1% and potentially going below 3% by the general election, the Resolution Foundation said.

The Bank of England’s interest rate rising cycle to quell inflation, which has led to cost jumps for borrowers, is thought likely to be approaching its end.

But many economic headwinds remain and about half of the £17 billion of higher annual mortgage costs from rising interest rates is yet to be passed on to households.

Those remortgaging next year could see their annual payments rise by about £3,000, the foundation added.

Meanwhile, some gains made from stronger pay growth will be swallowed up by frozen tax thresholds.

Inflation-adjusted gross pay is expected to rise by 2.9% over the course of the Parliament (2019-20 to 2024-25), but frozen tax thresholds mean that for the typical employee, post-tax pay will rise by just 0.6% in real terms over this period, the foundation said.

Taking various trends and expectations together, the foundation’s analysis indicates that real disposable incomes for typical working-age households are set for zero growth in 2024-25, having fallen by 4% over the previous two years (2021-22 to 2023-24).

The outlook is worse for low-to-middle income households, with the poorest half on track to see a disposable income fall of about 1%, the report said.

The foundation said: “This is not an ideal living standards backdrop to a general election. Since the 1960s, there is no example of a Government retaining a majority with such weak income growth.”

The think tank also noted some “big winners” during the election year, with a “savings boom” stemming from the sharp rise in interest rates.

Total gross income from interest on savings is expected to rise to £90 billion next year, equivalent to more than £3,000 per household on average, up from just £5 billion in 2021-22.

The bulk of next year’s savings windfall will go to the tenth of households with the most savings, giving them around £20,000 each on average, while the half of households with the lowest savings will receive around £100 each typically, the foundation said.

Households where people are aged 65 to 74 are expected to gain six times as much from the savings boom, on average, as those where people are aged 35 and under.

Adam Corlett, principal economist at the Resolution Foundation, said: “The good news for the Government is that Britain’s economic outlook is improving as it enters a crucial election year.

“The bad news is that the living standards outlook is still dire, with overall stagnation and further income falls on the way for less well-off households.

“Rapidly rising interest rates mean that families remortgaging next year could see their bills rise by £3,000, while richer and older households are set to take the lion’s share of Britain’s £90 billion savings income boom.

“The worst of the cost-of-living crisis may be behind us, but except for those with significant savings, it is stagnant living standards rather than boomtime Britain that the immediate future has in store.”