Families are facing a £1,200 hit in soaring energy bills and tax increases next year, a prominent think tank has calculated in what it called a looming “cost of living catastrophe”.
The Resolution Foundation said that 2022 looked set to be the “year of the squeeze”, with tax changes and an energy price increase both coming in April.
The think tank’s analysts predicted that real wages would grow by just 0.1 per cent next year due to rising inflation and may have actually fallen in November.
Politically, the crunch on incomes could be one of the biggest challenges Boris Johnson faces next year as he seeks a “high-wage, high-skill” economy while also raising taxes.
The Prime Minister is already facing calls from energy companies and Labour politicians to help families with rising energy costs, while Tory MPs push the Treasury to deliver on tax cuts.
Energy prices have rocketed – Natural gas and electricity day-ahead prices
Torsten Bell, the 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.
“The peak of the squeeze will be in April, as families face a £1,200 income hit from soaring energy bills and tax rises. So large is this overnight cost of living catastrophe that it’s hard to see how the Government avoids stepping in.”
The think tank’s estimate that the average UK household will see a £1,200 hit on their income in the year from April comes from calculating the impact of key policy changes and economic dynamics.
Rising energy bills, pushed up by supply side problems seen during the pandemic, will cost the average household about £500, plus a further £100 in costs passed on to consumers by energy firms that fold, according to Resolution Foundation estimates, reaching a total of £600.
It is estimated a further £600 will have to be paid per household as a result of tax changes that come into effect in April: the freezing of income tax thresholds, which sees more people pay higher rates, and the 1.25 percentage point increase in National Insurance to fund increased NHS spending and social care.
There will also be almost no real wage growth in 2022, on the Resolution Foundation’s calculations, with inflation estimated to peak at six per cent this coming spring, its highest level since 1992.
On energy bills, the Government is under mounting pressure to act to ease the price increase expected in April, despite the energy price cap.
Ministers have so far resisted calls to cut VAT on household energy bills, a demand being voiced by the Labour Party and some senior figures in the energy industry.
A meeting earlier this week between energy firm bosses and Kwasi Kwarteng, the Business Secretary, produced no new policy announcements.
NI tax calculator
Energy firms are pushing for the Government to set up a £20 billion fund to help companies spread out the cost of soaring global gas prices, amid fears energy bills could triple.
Mr Johnson’s decision to break a 2019 Tory manifesto pledge and increase National Insurance still splits opinion in his party. The change will kick in from April.
Rishi Sunak, the Chancellor, has vowed to spend any spare money in the coming years on tax cuts, but is under pressure from traditional low-tax Tory backbenchers to deliver on his promise.
The Prime Minister’s ambition to create a “high-wage, high-skill” economy, repeated this autumn amid supply chain shortages, complicates the hopes of ensuring significant inflation increases are only a temporary side effect of leaving Covid lockdowns.
Rising cost of living for longer
The Resolution Foundation has called for a reduction in the energy price cap rise, an expansion in the warm homes discount scheme, which benefits struggling families and pensioners, and the removal of environmental and social levies added to electricity bills.
Jonathan Ashworth, the shadow work and pensions secretary, said in response to the report: “Families and pensioners face a devastating new year cost of living crisis, yet Boris Johnson refuses to act.
“Heating bills are going through the roof, punishing tax rises are on the way, wages are stagnating, and 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.”
A Government spokesman said ministers had put in place £4.2 billion worth of “decisive action” to help support families with the cost of living.
This includes reducing the Universal Credit taper, worth more than £2 billion, and a range of measures to help with bills, including the energy price cap and cold weather payments, as well as freezing alcohol and fuel duty.