'Painful' years ahead, think tanks warn, as living standards set to fall

Living standards mean the financial resources households have available to support everyday life. The article mainly measures them through disposable income after taxes, benefits, and housing costs. This matters because income growth can look positive before essential costs are removed, yet households may still feel worse off.

The Resolution Foundation focuses on non-pensioner, working-age households. Its measure includes income after taxes, benefits, and housing costs. The OBR uses a broader measure covering all households, including pensioners. It also uses a 10-year rolling average to reduce the effect of short-term changes.

These different methods explain why the forecasts are not identical. The Resolution Foundation predicts a £1,050, or 3%, fall in typical working-age households’ disposable income by 2029. The OBR expects living standards for all households to grow by less than 0.1% a year by the decade’s end.

Typical working-age households are forecast to have £1,050 less disposable income by 2029. The Resolution Foundation describes this as a 3% decline. Disposable income here is measured after taxes, benefits, and housing costs, so the figure reflects what households have left for other spending.

The expected loss comes even though incomes for non-pensioner households will have risen by about £600 over the parliament. The Resolution Foundation says those gains have already happened. Higher energy bills, inflation, and frozen tax thresholds are expected to erode them during the second half of the parliament.

This forecast points to pressure on household budgets rather than a broad improvement in living standards. It also helps explain why the think tank calls the coming years “tough going”. The £100 energy payment is intended to help, but its support will not fully cancel out higher bills.

Household incomes are expected to grow slowly because the economy is losing momentum while costs remain high. The OBR cut its GDP growth forecast from 1.2% in 2026 to 1% in 2027. It also raised its 2027 inflation forecast from 2% to 3.4%. Slower growth limits income gains, while inflation reduces what income can buy.

Energy bills add another direct burden. The Resolution Foundation says households will pay more than during the 2022 energy crisis, even after government support. Frozen tax thresholds also reduce take-home pay as incomes change. The OBR blamed higher borrowing costs and inflation linked to the US-Iran war for the difficult financial situation.

The result is a weak outlook across the decade. The OBR expects living standards for all households to grow by less than 0.1% a year by decade’s end. The IFS calls it the worst decade on record for household-income growth, while warning that temporary support cannot solve weak underlying growth.

When costs rise faster than incomes, household budgets lose purchasing power. The same pay packet buys fewer goods and services. Higher taxes or frozen tax thresholds can further reduce take-home pay. Rising borrowing costs make mortgages, loans, and other debts more expensive, leaving less money for essentials or discretionary spending.

Energy bills show the mechanism clearly. The Resolution Foundation says households will face higher energy bills than during the 2022 crisis, even after government support. If those bills rise faster than disposable income, families must redirect money from other needs. A £100 payment can soften the increase, but it cannot remove the wider squeeze.

The broader consequence is weaker living standards and slower household-income growth. The Resolution Foundation expects typical working-age households’ disposable income to fall 3% by 2029. The OBR expects living standards across all households to barely grow by the decade’s end.

The government’s £100 energy payment is designed to give households immediate help with rising energy costs. Around 20 million households will receive it, with eligibility based on council tax bands. Chancellor John Healey described the support as creating “breathing space” for most households.

Its limitation is scale. The Resolution Foundation says households will still face higher energy bills than during the 2022 energy crisis, even after the extra support. A one-off £100 payment reduces the immediate bill increase, but it does not permanently lower energy prices or compensate for every household’s higher costs.

The foundation also argues that the payment is too broad rather than focused on those under the greatest pressure. It says support should have been more targeted at the poorest households. This reflects the wider forecast: higher bills, inflation, and frozen tax thresholds are expected to push living standards down despite temporary government assistance.

The Office for Budget Responsibility, or OBR, produces the UK’s official economic forecasts. The Resolution Foundation and the Institute for Fiscal Studies, or IFS, are economic think tanks that analyse household incomes, living standards, and public finances. Their work gives policymakers and the public evidence about the likely effects of economic decisions.

Their methods differ. The Resolution Foundation forecasts a 3% fall in typical working-age households’ disposable income by 2029. The OBR examines all households, including pensioners, and expects living standards to grow by less than 0.1% a year by decade’s end. The IFS says this decade could be the worst on record for household-income growth.

These assessments matter because government spending plans rely on forecasts. The IFS warns that tight spending plans underpin efforts to reduce borrowing. If growth or inflation differs from predictions, the government may face pressure to change spending, taxation, or support measures.

GDP growth matters because a growing economy can support higher incomes and provide more tax revenue. Slow growth, such as the OBR’s forecast of 1% in 2027, makes it harder for household incomes and public finances to improve. Inflation raises prices, so income must grow faster just to preserve purchasing power. The OBR raised its 2027 inflation forecast to 3.4%.

Taxes reduce take-home pay, especially when thresholds remain frozen as incomes change. Government borrowing covers the gap when spending exceeds revenue, but higher borrowing costs make that gap more expensive. Public spending can support services and households, yet tight spending plans may be needed to reduce borrowing.

These forces interact in the article’s outlook. Weak growth, higher inflation, and borrowing costs squeeze households and the Treasury. The government’s spending plans therefore face pressure, while temporary support offers only limited relief from falling or barely growing living standards.