Living standards forecasts for 2025 offer little cause for celebration, British think tank says | economic policy

Household incomes will remain stagnant or fall next year but Prime Minister Rachel Reeves will hope people will be better off as a result of improved public services, a leading think tank has said.

The Resolution Foundation calculated a new measure of real living standards, taking into account both disposable income and in-kind benefits from public services.

It found that the worst-off 10% of working age people could see a 2% reduction in disposable income, but this would be offset by improvements in public services, leaving them better off overall.

For the top half of income earners, their standard of living is likely to fall by 0.4% (140%) once improvements in public services are taken into account.

Mike Brewer, interim chief executive of the Resolution Foundation, said the Prime Minister's Budget tax hike gamble would not make people better off in purely financial terms, but it would be better off if we could have a better, less functioning public. He said he would feel it. service.

The poorest households are hit hard by rising housing costs and council tax increases, while also being affected by real cuts to social security payments. The wealthiest households are less dependent on public services and would benefit less from minimum wage increases.

“If you put the in-kind benefits of public services into cash figures, a 0.6% reduction in the real standard of living for the top 10 households would equate to a cash loss of $356 per person over the next year,” Brewer said.

Despite the government's new disposable income target in its Transformation Plan, the projections for living standards in 2025 are not cause for celebration. They believe they benefit from spending more on public services.

The Institute for Fiscal Studies said Reeves' outlook was poor on growth, inflation and the spending review scheduled for late next spring. Carl Emmerson, deputy director at the think tank, said Reeves' focus on investments was commendable and could deliver long-term benefits, but failing to deliver growth could be difficult.

The latest Office for National Statistics figures showed the economy contracted 0.1% in October after a similar decline in September, the first time gross domestic product (GDP) had fallen for two consecutive months since the pandemic broke out in March and April 2020.

The Bank of England (BoE) also expects gross domestic product (GDP) growth to be zero from October to December, and some economists are concerned about a recession. The Office for Budget Responsibility predicts GDP will grow 2% in 2025, but independent forecasters see an average of 1.3% growth in their latest estimates for 2025.

Prime Minister Rachel Reeves faces difficult forecasts for growth and inflation in her spring spending review, the IFS think tank said. Photo: Sarah Lee/The Guardian

Emmerson told the PA news agency: The outlook is uncertain. [Reeves] You might get lucky. Possible growth will exceed the OBR's forecasts and things could very well go ahead. But she can also become unhappy. And I think we barely know what she's going to do.

If she's not lucky, where will it go? [Labours] A promise to achieve growth? Not very good. And what will she do about public finances if she doesn't seem to have any intention of coming back to pay more taxes?

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She hasn't wavered too much on her financial goals, and while she's spending a lot on a daily basis this year and next, her spending plan starting in April 2026 looks pretty tight.

The spending review due in June will also be tricky for the Treasury, with the Treasury expected to seek 5% savings and many calls for additional spending to deal with pressures on public services.

Emmerson said: The biggest challenge will be the spending review. [Reeves has] The quota for this year has been confirmed. She had set her allocations for next year, but had two years to finalize her plan and things seemed much more manageable.

The period after that looks set to be very difficult, so the task of securing a spending review that Cabinet agrees will not be easy.

There are too many competing demands demanding more spending. In fact, this is an area where additional spending is not particularly focused on growth. I'm not saying that's a wrong thing to do, but a lot of money for the NHS, a lot of money for climate change, a lot of money for justice: you can make a case for spending, but I don't think that's the most obvious area. If you're only concerned about growth, consider spending.

Asked about the economic outlook, a Treasury spokesman pointed to Reeves' comments and said: The challenge we face in fixing our economy and adequately funding our public finances after 15 years of neglect is enormous. But this only fuels our passion to serve working people. Our plan for budget and transformation will deliver sustainable long-term growth and put more money in people's pockets through increased investment and ongoing reforms.

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