UK Faces Largest Drop in Standard of Living Since 1950s
Published / Last Updated on 27/11/2023
On the 22nd of November, the Office for Budget Responsibility (OBR) published its latest Economic and Fiscal Outlook for the UK and we have now had time to digest the contents.
- They suggest the economy recovered more fully from the pandemic and weathered the energy price shock better than anticipated.
- They expect inflation to remain higher for longer, taking until the second quarter of 2025 to return to the 2 per cent target, more than a year later than previously forecast.
- More persistent inflation means markets expect interest rates to be more than a full percentage point higher than we assumed in March and they forecast interest rates to fall to 4% by Autumn 2024.
- They have downgraded their estimate of UK economic growth to 1.6% pa from 1.8% pa.
- Unemployment to rise to 1.6 million people (4.6 per cent of the labour force) in the second quarter of 2025.
- Living standards, as measured by real household disposable income (RHDI) per person, are forecast to be 3½ per cent lower in 2024-25 than their pre-pandemic level. This is the largest fall in living standards since the 1950s.
- The Chancellor will spend almost all the additional taxes and national insurance raised from his Autumn Statement lack of tax cuts or changes on government borrowing between 2023-24 and 2027-28. Tax and NIC revenues go up each year through to 2028 but government borrowing will increase to cover those employee and employer NIC cuts staring in January and April 2024.
The above makes for unpleasant reading but is to be expected as both the Bank of England (inflation) and the Government (taxes and the economy) battle to get the UK back on a sound economic footing. We have said all along that we do not foresee interest rate falls until the Autumn 2024 unless there is a significant downturn in the economy.