Households are facing a “Groundhog Year” in 2023, as rising gas bills and a planned tax hike reduce disposable income and decline in living standards for a second year running.
Higher mortgage costs as fixed-rate loans expire and new deals are negotiated will add to the financial burden already felt by millions of families suffering from the worst drop in living standards in a century.
The Resolution Foundation is forecasting a 3.8% fall in disposable income in 2023 – or £880 per household – followed by a 3.3% decline in 2022.
Torsten Bell, chief executive of the independent thinktank, said: “From a cost-of-living perspective, 2022 was indeed a terrible year – far worse than any year in the pandemic or the financial crisis.”
He said 2023 should see double-digit inflation return, “but it appears to be a groundhog year for many households, whose incomes appear to be falling as much as they did in 2022”.
Although it appears that inflation has peaked, prices of essential commodities will continue to rise, adding to bills that in many cases have doubled from last year.
Household energy spending will rise by a record £900 to average £2,450 in 2023, up from £1,550 this year. Meanwhile, the income tax threshold has been frozen by the Chancellor, Jeremy Hunt, meaning that as average wages rise, the proportion will be handed over to the Treasury.
Mortgage payments will increase by £3,000 per year Nearly 2 million homeowners could be forced to refinance their loans in 2023. The sudden increase in average rent will affect lakhs of private tenants as well.
Bell said a decline in inflation over the next six months would improve the outlook for the economy and reduce pressure on policymakers to reduce spending.
The Bank of England, which has increased borrowing costs nine times over the past year, is likely to ease back on plans to raise interest rates further.
And the lowest income households will get some protection from the cost of living crisis after the government raised the national living wage and benefit levels by almost 10%.
However, Bell said: “It will be hit by shrinking pay packets, a record £900 increase in energy bills, £1,000 tax bills for typical households, and millions of people seeing their mortgage bills rise by four digits. “
The thinktank commissioned a YouGov poll of more than 10,000 people, which found those four times more likely than others to have improved their financial situation over the previous year.
A separate study by accounting firm PwC and credit app TotalMoney found 8.9 million adults were under severe financial stress after they reported needing to use overdraft facilities to cover daily expenses such as groceries.
Record levels of unsecured debt and rising interest rates were the main reasons households were struggling amid the cost of living crisis and may find it difficult to make repayments on their borrowings in 2023.
The study estimates that unsecured debt, such as personal loans, now exceeds £400bn, or a record high of £16,200 for each UK household.
Isabel Jenkins, head of financial services at PwC UK, said: “Unsustainable lending and borrowing can cause real harm to individuals and society, and vulnerable consumers may be disproportionately affected.”
A Treasury spokeswoman said the government was committed to supporting families with children, increasing benefits in line with inflation.
“We also have a plan that will help halve inflation next year, which will ease the financial pressures facing families, and bring millions already fully tax free by increasing tax-free allowances for both income taxes. Excluded from payment. And since 2010 National Insurance has been higher than inflation,” he said.
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