Office of Budget Responsibility says to Expect the Largest Fall in Living Standards on Record
The Real Standards of Living are set to fall this year by 2.2% and is not set to recover to the pre-pandemic level until 2024-2025. It was communicated by the Chancellor that the uncertainty over the war in Ukraine would mean that there is tough road ahead and people should be ‘prepared for the economy and public finances to worsen potentially significantly’. This would then cause the cost of borrowing to continue to rise.
The Chancellor stated that ‘It is too early to know the full impact of the Ukraine war on the UK economy’ the OBR also stated that there is ‘unusually high uncertainty around the outlook’. However increased inflation will erode consumption and real incomes therefore cutting GDP growth from 6% this year in the OBR’s October forecast to 3.8%. It is the expected by the forecasters for the economy to grow by 1.8% in 2023.
Despite there being lower growth it isn’t expected to affect jobs with the unemployment rate of 3.9% reverting back to pre-pandemic levels.
It has been highlighted that in February inflation rose to 6.2% which is the highest in 30 years, this was tried to be put into context in the Chancellors speech as he said it’s still lower than the US and ‘broadly in line’ with the euro area. The OBR has said that they expect inflation to continue to rise at an average of 7.4% this year.
Public Sector Debt
It has been predicted that borrowing and debt will move in the right direction meaning that Sunak said he would allow further investment in public services. It has been said by the OBR that public finances have continued to recover from the pandemic quicker than expected and this year tax receipts have been revised up by 4%. This is a result of strong growth in tax paid by higher earners and by companies.
It is also expected that underlying debt will steadily fall from 83.5% of GDP in 2022/23 to 79.8% in 2026/27. However, although inflation is pushing up debt interest costs it has meant that borrowing is set to more than halve from its post World War II high of £322bn. It will fall to 3.9% next year and the 1.9% the year after.
It is already being signposted by the OBR for need of more household support to come in Autumn in the event of another large rise in the energy price cap in October; the 5% fall in the real value of welfare benefits in 2022-23 also need to be addresses.
