British people are facing the biggest drop to their disposable incomes in 70 years as the cost of living crisis wreaks havoc on people's finances, according to grim analysis from the Office for Budget Responsibility (OBR).
With inflation set to hit a 40-year high in the coming months, the OBR forecasts that the average person will see their disposable income slashed by around 2.2% per person in 2022/23.
This amounts to "the biggest fall in living standards in any single financial year since ONS records began in 1956-57".
The report warned that households face years of economic misery, with disposable income not expected to return to pre-pandemic levels until 2024/25.
Inflation in the UK hit 6.2% in February, according to data released on Wednesday morning by the Office for National Statistics, the highest level since March 1992.
Making his spring statement to parliament, Rishi Sunak said inflation was forecast to average 7.4% this year due to “disruptions to global supply chains and energy markets, combined with the economic response to Putin’s aggression”.
The chancellor warned the nation must prepare for “the economy and public finances to worsen, potentially significantly”.
He said the UK’s sanctions against Putin’s regime for the invasion of Ukraine are “not cost-free for us at home”, and that it is "too early to know the full impact of the Ukraine war on the UK economy”.
Watch: Rishi Sunak says UK should prepare for economy to worsen "potentially significantly"
Sunak was under significant pressure to ease financial strain on households as he unveiled his latest policy measures
In a significant policy intervention, Sunak announced the national insurance contributions (Nics) threshold would rise by £3,000.
This will offset the planned rise in the rate of national insurance for those earning £35,000 or less, according to the Institute for Fiscal Studies.
The OBR said the policy measures set out by the chancellor – including existing financial help with energy bills – will offset around a third of the overall fall in living standards.
Labour's shadow chancellor Rachel Reeves has accused Sunak of “making an historic mistake” by failing to scrap a tax hike on jobs, warning families will “endure significant hardship” within days.
However, money saving expert Martin Lewis said the decision to raise the national insurance was a "good call".
Lewis, who has been vocal in urging the chancellor to protect low-income workers, welcomed the move, tweeting: "This is the big one. Increasing the national insurance threshold so it now matches income tax from July.
"That £3,000 rise of threshold to £12,570 is a gain of £330 a year, and more than offsets the 1% rise for many on lower incomes.
The overall burden of taxes is set to reach the highest level since the late 1940s by 2026-27.
The OBR said taxes would reach 36.3% of GDP, mainly as a result of policies already announced, including the health and social care levy and frozen income tax thresholds which will see more people dragged into paying tax.
At a glance: How the spring statement affects you
The main points from the chancellor's spring statement:
By the end of the current parliament in 2024, the government would cut the basic rate of income tax from 20p in the pound to 19p, which he said was “fully costed and fully paid for in the plans announced today”.
Fuel duty would be cut by 5p per litre for a year up until March 2023.
VAT on materials such as solar panels, heat pumps or insulation will be removed to help bring down energy costs, as well as on wind and water turbines.
Household Support Fund doubled to £1bn.
The chancellor said he would publish a “tax plan” as he announced the national insurance contributions threshold would rise by £3,000 “to fully equalise the Nics and income tax thresholds not incrementally over many years but in one go this year”.
Employment allowance for small businesses will rise to £5,000.