Living standards to be ‘far bleaker’ after 2026 despite Reeves’ claims
UK living standards are projected to drop in the two years before the next General Election as economists warned people were heading for “far bleaker” times ahead, turning up the heat on Chancellor Rachel Reeves to deliver on a commitment to ease the cost of living.
Economists at the Resolution Foundation, the left-leaning Westminster think tank that is closely linked to Labour ministers, have warned that living standards will fall after this year, even if the conflict in the Middle East does not continue for weeks on end.
In response to updated forecasts by the Office for Budget Responsibility (OBR), the think tank estimated that the income of an average working-age family would fall by 0.5 per cent between 2026 and 2029.
This equates to a £150 drop in income based on the OBR’s projections of wage growth over the next three years, which are set to grow by around 1.4 per cent over the next three years in real terms.
High income households hit hardest
However, should the Bank of England’s predictions on wage growth be more accurate than the OBR’s, living standards for families would rise by £200 over the final two years of the parliament.
The steep change in figures results from a small difference in economic predictions set by public body forecasters, reflecting the high stakes faced by the Chancellor in getting growth policies to stick.
Above middle-income families are set to be the worst affected by a fall in living standards, researchers suggested.
“With wage growth set to tail off, the living standards picture for the rest of the Parliament is bleak,” the think tank’s chief executive Ruth Curtice said.
“This should remind policy makers of the need to both navigate near-term uncertainty and support productivity-based economic growth over the medium term. That is the only way to meaningfully lift living standards throughout Britain.”
Living standards calculation differences
The Resolution Foundation uses a different calculation for household income than the OBR.
Reeves has talked up the prospect of British households being £1,0000 a year better off after inflation by 2030 compared to when Labour took office in 2024. The figure is based on the OBR’s estimates for real household disposable income.
OBR wonks warned that income growth hinged on the success of productivity gains in the UK economy.
Experts at Blick Rothenberg have said figures published by the OBR were “notoriously incorrect” and based on optimistic assumptions.
Analysts at the Institute for Fiscal Studies, a rival economics think tank, said the bar for a rise in living standards was low given the last parliament was the worst for growth in household incomes on record.
“The forecasts look similar to the growth seen in the 2010-2015 parliament, which still falls far short of the much stronger economic and income growth seen in the decades before the financial crisis,” IFS director Helen Miller said.
Analysts at both think tanks separately warned the war in the Middle East added extra risks, with the Resolution Foundation suggesting a sustained rise in oil and gas prices leading to £500 being added to household bills.
The IFS said decisions on government spending in relation to the crisis “could shape the second half of the parliament” as the think tank warned governments “rarely deliver” on plans to cut borrowing and ease pressures on public finances.