Cost of living: UK households face ‘major recession’ as crisis escalates

·Political Correspondent, Yahoo News UK
·5-min read
Britain's Chancellor of the Exchequer Rishi Sunak hosts a news conference in the Downing Street Briefing Room in London, Britain February 3, 2022. Justin Tallis/Pool via REUTERS
Chancellor Rishi Sunak has defended the government's actions to ease the cost-of-living crisis for Britons. (Reuters)

The UK is heading for a "major recession for households" amid the spiralling cost-of-living crisis, a top economist has said.

Jack Leslie, senior economist at the Resolution Foundation, told Yahoo News UK that people will see a "substantial" fall in their real incomes amid soaring energy bills, rising inflation, and tax hikes.

A country is in recession when it experiences two consecutive quarters of negative growth in gross domestic product (GDP).

In practical terms, a "household recession" means a significant hit to living standards, risking pushing vast numbers of families into fuel stress, and some into absolute poverty.

Read more: Energy prices to stay high for at last a decade, experts warn

Closed shops in Ballymoney town centre, Co Antrim as a fifth of shops in some Northern Ireland town centres are lying empty following the recession, it was revealed.
The Resolution Foundation have warned that 1.3 million Brits, including 500,000 children, could be pushed into poverty in 2022/23. (PA)

“We’re going into a major recession for households," said Leslie.

"And that is set against a period where there’s very little support for incomes, or to reduce the cost of living. The kind of scale of the policy support just doesn’t match up to the scale of the crisis."

Leslie added: “In practice, even if the GDP numbers aren’t telling you it’s a recession, in anything that matters for people living their lives, this is a recession."

Real term pay has been falling in the UK as wage growth fails to keep up with inflation, leaving workers with less money in their pockets.

The Office for National Statistics (ONS) recorded the biggest fall in real pay for nearly nine years in April.

The ONS said real pay was now “falling noticeably”, with figures for the month of February showing regular wages dropped 2.1% after inflation, the biggest drop since August 2013.

wage growth
Wage growth is not keeping up with rising prices. (ONS)

The Resolution Foundation have said that 1.3 million people, including 500,000 children, are set to slip into absolute poverty without further government support in 2022/23 - warning pensioners and disabled people are set to be hit hardest.

Read more: Boss gives staff £1,000 bonus to help with cost-of-living crisis

Chancellor Rishi Sunak has consistently defended the support the government is providing, including that in his recent Spring Statement, which announced:

  • An £3,000 increase in threshold for the point at which Brits start paying National Insurance contribution (NICs) thresholds following the 10% increase in April;

  • 5p off fuel duty for 12 months

  • An additional £500m for the government's Household Support Fund.

However, the chancellor has been warned by a growing number of experts this does not go nearly far enough to provide support for those most in need.

chart
Brits are facing the biggest drop in their disposable income since records began. (OBR)

"If you’re disabled and unable to work, or if you’re a pensioner, raising national insurance threshold does nothing for you," said Leslie.

"You got no benefit from that... it’s going to be very difficult for for those groups of people."

Chancellor of the Exchequer Rishi Sunak leaves 11 Downing Street as he heads to the House of Commons, London, to deliver his Spring Statement. Picture date: Wednesday March 23, 2022.
A large number of senior economists have called on Rishi Sunak to announce more support for Brits struggling with the cost-of-living crisis. (PA)

The economist warned that charities, like debt Step Change and Citizens Advice, have already been reporting sharp increases in Brits seeking help.

Both the Resolution Foundation and the Institute for Fiscal Studies (IFS) have said one of the key ways to support those facing financial despair is to up-rate benefits in line with inflation.

Read more: Energy boss's plan to reduce bills by £1,000 with new 'social tariff'

The Joseph Rowntree Foundation (JRF) has also called for up-rating of benefits in line with the Bank of England's February 2022 Monetary Policy Report forecast of 7% inflation by April.

Benefits increase each year in line with inflation for the year previously, meaning benefits increased by 3.1% in April - tantamount to an £11bn real terms cut.

“There can be no justification for this," said Peter Matejic, deputy director of evidence and impact at JRF in April.

Chancellor of the Exchequer Rishi Sunak is interviewed via videolink for Sky News' Sophy Ridge on Sunday, outside BBC Broadcasting House in central London.
Jack Leslie, senior economist at the Resolution Foundation, has warned every household in the UK will feel the pinch of the rising cost of living. (PA)

"Our social security system should protect people from harm, not put them in danger.

"The government must change course and ensure that benefit levels reflect the higher rate of inflation we are all now experiencing.

"There is no doubt that a failure to do so will leave more people in our society unable to meet their most basic needs.”

In March the government's watchdog, the Office for Budget Responsibility (OBR), warned living standards are set to drop to the lowest records since records began in 1956.

"The rising costs... [is] going to affect everyone," said Leslie.

Read more: Energy boss's plan to reduce bills by £1,000 with new 'social tariff'

"But obviously there are going to be kind of actual hits to living standards, particularly for low income people."

A government spokesperson said: “We understand that people are struggling with the rising cost of living, and while we can’t shield everyone from the global challenges we face, we’re supporting British families to navigate the months ahead with a £22bn package of support this financial year.

“This includes boosting the incomes of the lowest paid through a rise in the national living wage, saving a typical employee over £330 a year by increasing national insurance thresholds, and providing millions of households with up to £350 to help with rising energy bills.”

Watch: Cost of living crisis: The pensioners forced to use food banks and turn off their central heating