The Living Standards Outlook - Summer 2023 Update - Shocks For Some

6th September 2023

Household incomes are always a crucial perspective on how living standards are changing, particularly during economic crises. And in democracies, changing living standards also matter for politics, particularly ahead of elections.

As Ronald Reagan famously put it in 1980, the answer to "are you better off today than you were four years ago?" is often an important bit of context for voters.

In the UK, it mattered that David Cameron had the backdrop of a low energy cost living standards mini-boom in 2015, while Theresa May triggered an election during a period of falling real pay in 2017.

The past year has seen the biggest inflation shock in four decades, continued emergency policy interventions, and a rapid tightening of monetary policy. This briefing note takes stock of where this leaves household incomes, and considers what the year ahead - as well as the first year of the next parliament - may have in store. As such, it presents the likely living standards backdrop to a 2024 election.

Despite the very welcome return of real pay growth, we project zero real growth for the median non-pensioner household income in the 2024-25 election year. With zero growth also projected for 2023-24 and 2025-26, this is a three-year stagnation, following a sharp income fall in 2022-23.

For the lower-income half of the non-pensioner population, 2024-25 is projected to bring a 2 per cent real income hit overall - almost as large as (but additional to) the 2022-23 shock. An extra 300,000 people are projected to fall into absolute poverty next year.

We estimate that total interest on bank accounts, cash ISAs and other savings will reach £90 billion in 2024-25 - or over £3,000 per household - up from just £5 billion in 2021-22. In contrast, around half of the mortgage cost rise is still to come, while around 90 per cent will have fed through by Q4 2024.

Overall, the tenth of households with the most savings wealth will account for two thirds (65 per cent, or around £60 billion) of savings interest in 2024-25, receiving an average of £20,000 each, before tax. In contrast, the half of households with the lowest savings will receive only 2 per cent of total interest income, or around £100 each, on average. Households aged 65-74 will gain six times as much on average as those under 35.

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