Living standards outlook 'bleak but not set in stone'

Employees face weaker wage growth by the time Labour reaches its first anniversary in power unless Sir Keir Starmer’s team can “beat the forecasts that they have inherited”, according to a think tank economist.

The Resolution Foundation has warned of a “weak” living standards outlook for middle-income households in a report published on Thursday, which is “even worse” for poorer families, who could lose out if ministers press ahead with benefit cuts set by the previous Conservative administration.

Alex Clegg, an economist at the think tank, said Bank of England and Office for Budget Responsibility (OBR) forecasts showed the majority of income growth before 2030 is expected in this year alone.

“After that, wage rises are forecast to weaken and be overtaken by rent and mortgage cost increases,” he said.

Incomes are expected to grow by 3% in 2024/25, but annual median income growth for non-pensioner households is forecast to tumble to 0.4% between 2024/25 and 2029/30.

This would leave annual average income growth over the whole Parliament at 0.8% – or £1,400 per household.

According to the Resolution Foundation, its Living Standards Outlook 2024 forecasts “are bleak, but not set in stone, and the report sets out three plausible scenarios in which the outlook for incomes and poverty can be greatly improved”.

Its economists suggested boosting real annual wage growth by one percentage point from 2025/26 onwards, to raise typical income growth for non-pensioner households to 8% by the end of the Parliament – up from 5%.

Scrapping the two-child limit on universal credit support and benefit cap, and raising the local housing allowance from 2025 – the figure used to calculate how much housing support private renters can get – could “lift 600,000 children out of poverty overnight”.

The move would cost £3.5 billion in 2025/26, according to the think tank.

A third proposal to uprate working-age benefits in line with wages rather than prices from 2025 would cost around £9 billion a year by the end of the Parliament, the economists said, but “would stabilise child poverty rates at a lower level than in the previous parliament”.

Mr Clegg said: “Britain is currently experiencing a mini living standards recovery as inflation falls but wage rises remain high.

“But this isn’t set to last, with the majority of income growth projected over the Parliament coming in this year alone.”

He added: “While the outlook for middle-income households is weak, it’s even worse for poor households, with 400,000 children at risk of falling below the poverty line.

“This troubling outlook highlights the need for the new Government to beat the forecasts that they have inherited.

“A new economic strategy that delivers stronger growth, coupled with the reversal of damaging benefit policies set by the previous government, could still make this a Parliament of fast-rising living standards and falling poverty.”

The Prime Minister himself warned “things will get worse before they get better” in a Downing Street garden speech on Tuesday.

Sir Keir said: “I said before the election, and I say it again really clearly today, growth – and frankly, by that, I do mean wealth creation – is the number one priority of this Labour Government.”

But the Prime Minister faced a small Commons rebellion over the two-child benefit cap when Parliament returned after the General Election in July.

He temporarily stripped seven MPs, including former shadow chancellor John McDonnell, of the Labour whip when they backed an SNP-led motion to scrap the two-child benefit cap.