In total, one-and-a-half million people will be in relative poverty by the end of this Parliament, which could signify a rise from 21% of the UK population to 23%, according to the Resolution Foundation Living Standards Outlook.
The annual forecast gathers projections from the Bank of England, Office for Budget Responsibility (OBR), and other public finance projections.
This will be an impact of the two-child limit, benefit cap and the freeze to the Local Housing Allowance to be introduced in April 2025, the think tank forecasts.
All three of those policies were recommended to be scrapped by the think tank, which it predicts would lift one million people – including 600,000 children – out of relative poverty “overnight”.
The projection comes as future growth in real-term earnings is expected to be slow in the next five years, compounded with the increase in unemployment, which is set to peak at 4.8% in the 2026/27 financial year.
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Median household income for those not receiving the state pension will increase from £30,000 in 2023/24 to £31,400 in five years, at an increase of 0.8% per year – considered to be a slow level of growth.
Further, the freezing of tax thresholds will also limit the amount families see of their yearly salary.
The outlook predicts that if the tax bands stayed as are, by 2028/29, a worker on the median wage would pay £230 more than if the thresholds were uprated each year from 2025/26.
Housing costs and rising rents to skyrocket
Another issue impacting families’ living standards is the extortionate housing costs to pay, with rent predicted to skyrocket at a faster level than income growth.
At its current rate, the average housing cost-to-income ratio for homeowners will hit 15%, meaning a property will cost around 6.67 times a worker’s average salary.
Due to the concerning outlook for the future, which half of voters before the election thought could be the case, the upcoming year signifies the strongest year for growth in the UK.
There will be a real-terms income growth for median earners of 3% due to inflation reaching the 2% target set by the Bank of England and disposable income increasing. This is in part helped by the reduction of National Insurance to 8%, introduced by the former Conservative Government.
However, this is set to be an anomaly across the Labour Government’s first five years, with low-income households set to lose £600 more per year in real terms in 2029/30 than they were in 2023/24. The outlook says this is the same level of income that they would have received in real terms in 2004/05.
Meanwhile, the average income at the 20th percentile (the lower fifth of UK earning amounts) would be £100 worse off in five years than they would have been last year.
‘Mini recovery is not set to last’
Alex Clegg, economist at Resolution Foundation, says Britain is experiencing a “mini living standards recovery” thanks to the fall in inflation coupled with wage rises.
But, Clegg says “this isn’t set to last, with the majority of income growth projected over the Parliament coming in this year alone.”
He said: “After that, wage rises are forecast to weaken and be overtaken by rent and mortgage cost increases.
“And 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.”
Clegg added: “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.”
