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UK disposable incomes to fall by 3.8% in 2023

Households are facing a “groundhog year” in 2023, as soaring gas bills and planned tax rises squeeze disposable incomes and send living standards tumbling for the second year running.

Higher mortgage costs as fixed-rate loans come to an end and new deals are negotiated will add to the financial burden already felt by millions of households reeling from the worst fall in living standards in a century.

The Resolution Foundation is forecasting a slump in disposable incomes of 3.8% in 2023 – or £880 per household – after a 3.3% fall in 2022.

Torsten Bell, the chief executive of the independent thinktank, said: “From a cost-of-living perspective, 2022 was a truly horrendous year – far worse than any year in the pandemic or financial crisis.”

He said 2023 should see the back of double-digit inflation, “but it looks set to be a groundhog year for many families whose incomes look set to fall by just as much as they did in 2022”.

Although inflation seems to have peaked, the prices of essential items will continue to rise, adding to bills that have often doubled since last year.

Household energy spending will jump by a record £900 to an average of £2,450 in 2023, up from £1,550 this year. Meanwhile, the chancellor, Jeremy Hunt, has frozen disposable income tax thresholds, meaning as average pay rises, so will the proportion handed over to the Treasury.

Mortgage payments will increase by £3,000 a year for about 2 million homeowners forced to refinance their loans in 2023. A knock-on rise in average rents will also hit millions of private tenants.

Bell said a decline in inflation over the next six months would improve the outlook for the economy and ease the pressure on policymakers to tighten spending.

The Bank of England, which has increased the cost of borrowing nine times over the last year, will likely ease back on plans to raise interest rates any further.

And families on the lowest disposable incomes will get some protection from the cost of living crisis after the government raised the national living wage and benefit levels by about 10%.

However, Bell said: “This will be swamped by shrinking pay packets, a record £900 rise in energy bills, tax bills for the typical household rising by £1,000, and millions seeing four-digit increases in their mortgage bills.”

The thinktank commissioned a YouGov poll of more than 10,000 people, finding that they are four times as likely to think their financial situation has worsened over the past year.

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