UK households face a hit of £1,200 next year as stalling wages and rising tax and energy bills cause a “cost of living catastrophe” in the spring, a leading thinktank has warned.
Government measures, including the new social care levy on national insurance and the freezing of the personal income tax allowance, will combine with high inflation to make 2022 the “year of the squeeze”, the Resolution Foundation said.
It warned that in April the introduction of tax changes, with a new price cap on energy bills, will cost families £1,200 overnight.
“The months ahead will not be easy for households who see their wages fall back as energy bills and taxes rise,” the report said. “As Omicron hopefully fades in the early months of 2022, we will come to realise the scale of the challenge posed to household finances.”
UK inflation hit a 10-year high in November, and economists have suggested it will rise further in 2022. One of the biggest factors has been energy bills, which have been driven up by rising wholesale gas prices and the failure of many of the cheapest suppliers.
Households have been shielded from some of the increases by an energy price cap, which means suppliers have to offer gas and electricity at or below a unit price set by the regulator, Ofgem.
The cap is due to be reviewed in February and come into effect in April, and record wholesale gas prices in recent weeks have led to speculation that it could allow households bills to rise above £2,000. Kwasi Kwarteng, the business secretary, was locked in crunch talks with energy bosses on Monday, but this failed to deliver a breakthrough. The founder of Ovo Energy has warned that household bills will “almost certainly” double in April without government intervention.
The Resolution Foundation’s calculations are based on an average rise of £600 in prices, which would take bills to about £1,900 a year.
The thinktank said an increase in the price cap in April would have the biggest impact on low-income households as they spend more of their income on energy. It said the poorest households would see spending on gas and electricity rise from 8.5% to 12% of their earnings.
Higher-income households will face a bigger hit from the government’s decision to freeze personal tax allowances at £12,570 a year, which was announced in March’s budget, and the 1.25-percentage point increase in national insurance to fund social care.
The average cost for households of these changes will be £600, but for those households in the top 50% of earners, the national insurance rise alone will add an average of £750 to annual outgoings.
The Foundation said wage growth had stalled in 2021 and in real terms wages were likely to fall for most of 2022. It forecast a rise of 0.1% over the year, once inflation was taken into account, but said it expected that by the end of 2024 real wages would be £740 a year lower than if the UK’s pre-pandemic pay growth had continued.
The report called on the government to consider ways to mitigate rising living costs, including raising universal credit, holding down the price cap and temporarily removing VAT on energy bills.
Torsten Bell, chief executive of the Resolution Foundation, 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.”
Of the £1,200 income hit in April, Bell said: “So large is this overnight cost-of-living catastrophe that it’s hard to see how the government avoids stepping in.
“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.”
Labour criticised Boris Johnson for failing to mitigate the cost-of-living crisis that is about to hit families and pensioners.
“Heating bills are going through the roof, punishing tax rises are on the way, wages are stagnating, universal credit cuts have hit struggling families hard, all while prices in the shops are rising and inflation risks eroding the value of savings and pensions,” said Jonathan Ashworth, the shadow work and pensions secretary.
Ashworth said Labour would help ease the burden by scrapping VAT on household heating bills over winter, and would not hit working families “with a punishing national insurance rise at the worst possible time”.
Responding to the report, a government spokesperson said: “We know people are facing pressure with the cost of living – which is why we’re taking £4.2bn of decisive action to help.
“This includes reducing the universal credit taper – a tax cut worth over £2bn – supporting households with their bills through the energy price cap, warm home discount scheme, winter fuel payments, cold weather payments, and household support fund, as well as freezing alcohol and fuel duty.”