Expect largest fall in living standards on record, says OBRby
Real living standards are set to fall by 2.2% this year – their largest financial year fall on record.
Real living standards are set to fall by 2.2% this year – their largest financial year fall on record – and not recover their pre-pandemic level until 2024-25. That’s the stark message delivered by the OBR’s quarterly outlook report immediately after the Chancellor sat down from his Spring Statement.
The Chancellor signalled a tough road ahead, saying uncertainty over the Ukraine war meant people should be “prepared for the economy and public finances to worsen potentially significantly”, and for the cost of borrowing to continue to rise.
He said: “It is too early to know the full impact of the Ukraine war on the UK economy,” adding that the OBR had cited “unusually high uncertainty around the outlook”. But higher inflation will erode real incomes and consumption, cutting GDP growth this year from 6.0% in the OBR’s October forecast to 3.8%. The forecasters then expect the economy to grow by 1.8% in 2023.
OBR spring 2022 outlook at a glance
The lower growth outlook is not expected to affect jobs, with the 3.9% unemployment rate reverting to pre-pandemic levels.
This morning’s headlines already highlighted that inflation rose to 6.2% in February - a 30-year high. Sunak tried to put this in context during his speech, saying this is still lower than the US and “broadly in line” with the euro area. The OBR said it expects inflation will continue to rise, averaging at 7.4% this year.
Back in October’s Budget, Sunak had warned that we should expect the consumer price index (CPI) to average 4% this year. Then, the OBR report had added that the UK’s exit from the EU also exacerbated problems such as delays at ports or with deliveries.
Consumer price index forecast 2022-27
Public sector debt
However, borrowing and debt were predicted to move in the right direction - which the Chancellor said would allow further investment in public services.
The OBR today said that public finances have continued to recover from the pandemic more quickly than expected and that tax receipts this year have been revised up by 4% as a result of strong growth in tax paid by higher earners and by companies.
Underlying debt is expected to fall steadily from 83.5% of GDP in 2022/23 to 79.8% in 2026/27. And although inflation is pushing up debt interest costs, borrowing is set to more than halve from its post-World War II high of £322bn (15% of GDP) in 2020-21 to £128bn (5.4% of GDP) in 2021-22, £55bn less than forecast in October. It will fall to 3.9% next year, then 1.9% in the following year.
The OBR is already signposting the need for more household support come the autumn, in the event of another large rise in the energy price cap in October; as well as a need to address the 5% fall in the real value of welfare benefits in 2022-23. And, it says, the recent rise in hospitalisations demonstrates that Covid remains a longer-term risk to the economy.
Commenting on the Spring Statement, Treasury select committee chair Mel Stride said: “The Chancellor has brought forward some helpful measures to alleviate cost of living pressures faced by low-income households. He has also brought forward a future income tax cut.
“The Treasury committee will be particularly interested in establishing whether the balance struck between support measures introduced now, and planned tax cuts later, is the right one. We will also wish to assess whether the amount of fiscal headroom that the Chancellor has maintained is appropriate, given the many risks present in the OBR’s forecast and the pressing need to provide cost of living support now.”
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