2022 will be defined as the ‘year of the squeeze’
Families will face a £1,200-a-year hit to their incomes next year, with a report warning of a “cost-of-living catastrophe” due to soaring energy bills and rising taxes.
The Resolution Foundation (RF) said from April families would be hit with a rise to the energy cap and a 1.25 per cent increase in National Insurance contributions (NICs).
At the same time, rising inflation – forecast to peak in the spring at six per cent (its highest level since 1992) – means that real pay levels are set to stagnate, with real wages next Christmas no higher than this year.
The foundation’s chief executive, Torsten Bell, said in a report released Wednesday that the “squeeze” on living standards is likely to be so severe that Chancellor Rishi Sunak will come under intense pressure to act.
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The RF said the financial sting would be most acutely felt in April when the cap on energy bills is expected to rise by around £500 a year while the cost of energy firm failures would add another £100 to consumer bills.
Bell said: “2022 will begin with Omicron at the forefront of everyone’s minds. But while the economic impact of this new wave is uncertain, it should at least be short-lived. Instead, 2022 will be defined as the ‘year of the squeeze’.
“The overall picture is likely to be one of prices surging and pay packets stagnating. In fact, real wages have already started falling, and are set to go into next Christmas barely higher than they are now.
“The peak of the squeeze will be in April, as families face a £1,200 income hit from soaring energy bills and tax rises. So large is this overnight cost of living catastrophe that it’s hard to see how the Government avoids stepping in.”
The price rise will disproportionately affect low-income families who spend more of their income on energy. It is expected to account for 12 per cent of the income of the poorest households compared with 8.5 per cent now.
At the same time, the RF said the freeze to income-tax thresholds and the 1.25 per cent increase in personal NICs would cost the average household £600 a year. For families in the top half of the income distribution, the NIC rise alone would lift tax bills by an average of £750.
Meanwhile, the RF said real wages, which were flat in October, had “almost certainly” started to fall and would not pick up again until the final three months of 2022, leaving real pay just 0.1 per cent higher than it was at the start of the year.
By the end of 2024, real wages would still be £740 a year lower than if the UK’s “already sluggish” pre-pandemic pay growth continued.
Bell said the top of the government’s New Year resolutions should be addressing April’s energy bills hike, “particularly for the poorest households who will be hardest hit by rising gas and electricity bills”.
The RF said the government’s top priority for further action should be tackling rising energy bills and suggested the following options to do so:
- Reducing the size of the energy cap rise directly. Compensating energy suppliers for a six-month, £200 reduction would cost around £2.7 billion, or £450 million if focused on lower-income households on Universal Credit.
- Extending the time period over which the costs of supplier failures are recouped, with the £100 bill rise reflecting a policy of recouping costs over a single year.
- Moving environmental and social levies currently added to electricity bills into general taxation, saving households £160 per year and costing up £4.5 billion per year.
- Extending and increasing the Warm Homes Discount.
Read the full Resolution Foundation report here.
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