Rises in taxation and public spending cuts in the Chancellor’s autumn statement are not necessary and may further damage the country’s already anaemic growth prospects, according to the latest quarterly outlook of the UK economy by the National Institute of Economic and Social Research (NIESR).
Faced with the triple shock of soaring energy, food and housing costs, nearly six million households will see their savings fall to negligible levels despite the Energy Price Guarantee (EPG) and other support measures. We project that nearly 1 in 5 households will have little or no savings by April 2024 and will therefore struggle in the absence of further government assistance.
The rise in mortgage interest rates is further affecting households. As well as those households with fixed-rate mortgages coming up for renewal in the coming months, our analysis shows that mortgage repayments on a variable rate will rise by at least 50 per cent on average when Bank rate hits its projected peak of 4.75 per cent. This, alongside projected rent increases, may push an additional 250,000 households into extreme poverty. We propose a £2bn Housing Support Fund administered at local authority level to help with fast-rising housing costs.
The government should therefore help the hardest-hit households and put in place a plan for reducing public-sector debt once the shocks have dissipated. As a result of previous rounds of spending cuts, some public services cannot return to pre-pandemic levels of activity. Reducing spending further would exacerbate the situation. If the government really is serious about growth, it should not be reducing the capital investment.
Other key points include:
- We no longer expect a recession to occur in 2022, although there is a significant risk of a recession in 2023. GDP growth is anticipated to be 0.8 per cent year-on-year in 2023 and 1.8 per cent in 2024;
- The Energy Price Guarantee (EPG) has lowered the peak in CPI inflation, which we now expect to be 11 per cent in January 2023. Nonetheless, we think inflation is likely to be more persistent than previously forecasted, only falling to 5.7 per cent by the end of 2023 and not reaching the Bank of England’s target of 2 per cent until the third quarter of 2025;
- Nominal wage growth to remain high over the duration of the forecast, with average earnings to grow at 5.7 per cent in 2023, 4.4 per cent in 2024 and 2.3 per cent in 2025. However, given this is not keeping pace with inflation, we predict that real wages will continue to fall until late 2023.
We recommend that the Government use the Autumn Statement to:
- raise benefits in line with inflation to prevent a further increase in destitution, which already affects about 1.2 million people;
- introduce a Universal Credit uplift of £25 per week for twelve months at a total cost of £2.7bn;
- maintain capital spending outside London and the South-East; working with business to unlock private investment. Anticipated cuts to capital investment will worsen the prospects for levelling up;
- Introduce a variable price cap scheme for energy bills. If implemented it would provide targeted support, for those households that need it most, in a cost-efficient way that would improve public finances.
Professor Stephen Millard, Deputy Director for Macroeconomics, said: “With the economy still reeling from the effects of the terrible Russian invasion of Ukraine and the Monetary Policy Committee raising interest rates to bear down on inflation, now is not the time to be tightening fiscal policy. In fact, given that existing announcements have already restored stability to the financial markets and high inflation continues to benefit the overall fiscal position, it’s not at all clear that the Chancellor needs to raise taxes or cut spending in the Autumn Statement next week. It just doesn’t have to be this way! ”.
Professor Adrian Pabst, Deputy Director for Public Policy, said: “Households up and down the country face soaring energy bills, food prices and housing costs. This triple shock to income is hitting hardest the 5 million on Universal Credit and 11 million lower-income households. Support policies like the Energy Price Guarantee are not enough to cushion the blow while at the same time subsiding high-income households that have sufficient income and savings to absorb the shock. With six million households running out of savings by April 2024, we need targeted policies to help the most vulnerable. Our policy proposals include a variable energy price cap, a £2bn Housing Support Fund to be disbursed by local authorities and a £25 per week uplift in Universal Credit for 12 months to prevent around 250,000 from sliding into destitution”.