Middle-income households could face worse economic hit than financial crash

The growing cost-of-living crisis could leave households facing the "biggest hit" to living standards since the 2008/09 financial crisis, economists have warned.

Inflation in the UK is set to hit its highest level in 30 years, with soaring energy bills, tax hikes, and the additional economic repercussions of the war in Ukraine set to leave millions of Brits facing financial turmoil.

Paul Johnson, director at the Institute for Fiscal Studies (IFS), warned on Thursday that a failure by chancellor Rishi Sunak to introduce urgent economic interventions to protect households could have a catastrophic impact.

"At the spring statement. Rishi Sunak has to make a huge judgment call," Johnson said.

"Will he do more to protect households from the effects of energy prices which have risen even further in the last two weeks? 

"If he doesn’t then many on moderate incomes will face the biggest hit to their living standards since at least the financial crisis. If he does, then there will be another big hit to the public finances."

Read more: 'Extraordinary' warning energy bills may go much higher than £3,000

Sunak is set to deliver his spring statement on 23 March, which ordinarily would not be a moment when big spending announcements are made. However, pressure is growing on the chancellor to increase the level of government support.

In February, he unveiled an 'energy rebate scheme' worth £350 following the energy regulator's decision to increase the price cap by 54% from April that will increase the typical by £693 to £1,971. However, the announcement was widely criticised for not going far enough and £200 of it being repayable.

On Wednesday, Mike Brewer, chief economist at the Resolution Foundation think-tank, warned household energy bills are now likely to surpass £3,000 a year amid growing instability in the energy markets sparked by the war in Ukraine.

When asked whether Boris Johnson will be announcing new support in response to the deteriorating economic situation on Thursday, his spokesperson said Number 10 are monitoring the situation but did not outline any new plans.

"The important thing is we continue to monitor the situation," they said. "The prime minister has acknowledged that people are continuing to see a rise in energy prices and the rising petrol prices, or the cost of their lives continue to increase.

"It’s right that we we continue to support people throughout this difficult period.”

Labour has accused the government of allowing the cost-of-living crisis to "spiral out of control" and called on it to cancel their planned tax hikes.

"The government... will make it even worse with an unfair tax hike," said shadow chancellor Rachel Reeves.

Read more: Martin Lewis warns UK ministers are blaming cost-of-living crisis on Ukraine war

"The Conservatives should halt their National Insurance hike in April – and they must look again at Labour’s proposal for a one-off windfall tax on oil and gas producers to cut household energy bills by up to £600.

"But we’ve also got to get out of this Tory high-tax, low-growth trap that is making our economy less resilient and leaving public services weakened."

On Tuesday, the Resolution Foundation's chief executive Torsten Bell warned living standards are set to become worse than they were during the pandemic and will take years to recover back to pandemic levels.

"Even when you get to the middle of the 2020s, we still won’t be as well off as you were during the pandemic," he said.

"That’s how big what is going on - we’ll be pulling our way back to where we were when it was when the actual lockdowns were going on."

Watch: Cost of living crisis will be ‘fatal’ for some children in poverty - Jack Monroe