Living standards
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Prices & consumption

The Living Standards Outlook 2023

Mike Brewer
Mike Brewer
Emily Fry
Emily Fry
Lalitha Try
Lalitha Try

2022 was a disaster for UK living standards. As inflation reached its highest level in 41 years, the Government responded with household cost of living support of £58 billion in 2022-23. Facing a tight labour market, employers raised nominal pay by its fastest rate since 1991. But real pay still shrunk, and government support was not enough to prevent median household incomes from falling by 3 per cent in 2022-23.

To deepen our understanding of where this crisis leaves Britain, our fifth Living Standards Outlook uses two approaches. First, a new survey of 10,000 adults in the UK explores how households are coping with the current crisis and what its lasting effects may be. Second, our modelling helps us to understand what the latest economic developments and planned government policy mean for household incomes and poverty this year and beyond.

Key findings

  • Three-quarters of UK adults reported in November that they were trying to cut back on overall spending.
  • 45 per cent of respondents, or 24 million people, are quite worried or very worried about their energy bills over the winter months, but this rises to 63 per cent of workers in the bottom income quintile, and 62 per cent of those paying their energy bills using a pre-payment meter (PPM) (compared with 43 per cent of people who pay energy bills using direct debit).
  • Almost one-in-five (19 per cent) of people in our survey – or 10 million – are not confident about their finances as a whole over the next few months, but for workers in the bottom income quintile, this rises to 32 per cent, and to 43 per cent for those not working and on benefits.
  • In November 2022, 28 per cent (up from 9 per cent pre-pandemic) of adults say that they could not afford to eat balanced meals, and 11 per cent or 6 million adults (up from 5 per cent pre-pandemic) reported being hungry in the past month because they lacked enough money to buy food. 23 per cent of those receiving means-tested or disability benefits are severely food insecure this winter, up from 4 per cent pre-pandemic. Similarly, rates of food insecurity are much higher among families with three or more children, single parent families, and among certain non-white ethnic groups.
  • In November 2022, 11 per cent of respondents said that their debts had increased moderately or substantially in the past three months, rising to 20 per cent amongst workers in low-income families. This compares with 7 per cent of adults, and 12 per cent of low-income adults, who saw debts rise during the pandemic (comparing February 2020 to May 2021). People are also falling behind on bills: 10 per cent of people – and a quarter of workers in poorer households – have missed at least one payment of a priority bill over the past three months.
  • Families are taking actions to cope with higher costs today which will worsen their future financial resilience. In November 2022, 27 per cent of adults report using their savings for daily living expenses in the previous four weeks up, from one-in-five (20 per cent) in June. In the four weeks preceding the survey, 12 per cent of workers in the lowest income quintile report selling or pawning possessions they would have preferred to keep, 7 per cent have cancelled or not renewed their insurance, and 7 per cent say they have stopped or reduced pension contributions to save money.
  • The percentage of people facing emotional distress has increased from 40 per cent in October 2021 to 47 per cent in November 2022. Those receiving state benefits (excluding Child Benefit or the state pension) are increasingly in emotional distress, with 64 per cent affected, compared to 42 per cent for those who do not receive any benefits.
  • The typical after housing costs income of non-pensioner households is set to fall by 3 per cent in 2022-23, and fall by an even larger 4 per cent in 2023-24. A fall of that scale in 2023-24 would be the largest single-year fall since 1975, and the two-year fall of 7 per cent (or £2,100 for a typical household) is bigger than in the financial crisis. This will take typical real-terms incomes in 2023-24 back to where they were in 2018-19.
  • In 2022-23 and 2023-24, income falls are generally greater as we move up the income distribution, reflecting that the Cost of Living Payments are worth more to lower-income households than those on higher incomes, that benefits being uprated by 10.1 per cent in April 2023, and that low-income households are also less affected by higher mortgage bills. However, when differential inflation is taken into account, this difference shrinks, and real incomes among the poorest fifth of households will fall by 5 per cent, compared to 8 per cent for rich households (in the 19th vigintile of the distribution).
  • Rising interest rates boost savings and investment incomes so that incomes of the top 5 per cent are on course to rise by 4 per cent between 2021-22 and 2023-24. Although income inequality across the bulk of the distribution will fall during 2022-23 and 2023-24, this rapid growth in investment income means that the Gini coefficient is projected to reach a record high of 40.8 per cent in 2027-28.
  • The cost of living crisis should ease in 2024, but real wages are not expected to return to their Q1 2022 level until the end of 2027. Typical incomes are set to be below their real-terms pre-pandemic (2019-20) level even in 2027-28.
  • Absolute poverty is set to rise in the short-run, from 17.2 per cent in 2021-22 to 18.3 per cent in 2023-24 (or an additional 800,000 people in poverty). Relative poverty is set to fall considerably in 2022-23 and 2023-24, as typical income falls by more than that of low-income households, but will then trend upwards. Child poverty in 2027-28 is forecast to be the highest since 1998-99, with 170,000 more children in poverty than in 2021-22. This rise is driven entirely by large families: child poverty for families with three or more children is set to hit 55 per cent in 2027-28, and 77 per cent of children in families with four or more children will be in poverty by 2027-28.

Recommendations

  • The fact that wholesale gas prices have now fallen, while retail energy prices households face are set to rise, means there is likely to be a renewed debate about whether the Energy Price Guarantee should rise above its current £2,500 level, as is planned for April.
  • The Government should look at the Cold Weather Payments, and consider whether the trigger temperature should be raised, so that they are paid more often, and eligibility extended to more working-age households receiving benefits.
  • In the medium-run, better insulation is key to reducing household energy bills and easing the transition to net zero, but this requires a greater focus on UK’s homes’ inefficient walls.
  • Linking Cost of Living Payments to receipt of security benefits or the state pension makes it more important than ever that those entitled to those benefits claim them, and the Government (and other organisations) should be encouraging take-up of means-tested and disability benefits. The UK Government should also mandate a minimum provision of crisis support by local authorities, if necessary with ring-fenced funding.
  • Families with three or more children are heavily affected by the two-child limit, the benefit cap (the inflation increase this year is its first nominal increase since 2013), and the post-pandemic freeze in LHA rates. All of these policies should be reviewed.

Further reading

Unsung Britain
The changing economic circumstances of the poorer half of Britain
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Mike Brewer, Molly Broome, Nye Cominetti, Adam Corlett, Charlie McCurdy, Louise Murphy, Cara Pacitti, Hannah Slaughter, James Smith, Lalitha Try
Cold comfort
Mitigating the Winter Fuel Payment cut
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Alex Clegg, Jonathan Marshall
The Living Standards Outlook 2024
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Alex Clegg, Adam Corlett
Mike Brewer
Mike Brewer Interim Chief Executive
Emily Fry
Emily Fry Senior Economist
Lalitha Try
Lalitha Try Economist