The Resolution Foundation is forecasting a slump in disposable incomes of 3.8% in 2023 – or £880 per household – after a 3.3% fall in 2022.
Soaring gas bills and planned tax rises squeeze disposable incomes will send living standards tumbling for the second year running.
Higher mortgage costs as fixed-rate loans come to an end and new deals are negotiated will add to the financial burden already felt by millions of households reeling from the worst fall in living standards in a century. Mortgage payments will increase by £3,000 a year for about 2 million homeowners forced to refinance their loans in 2023. A knock-on rise in average rents will also hit millions of private tenants.
Torsten Bell, the chief executive of the independent thinktank, said: “From a cost-of-living perspective, 2022 was a truly horrendous year – far worse than any year in the pandemic or financial crisis.” He said 2023, "...looks set to be a groundhog year for many families whose incomes look set to fall by just as much as they did in 2022”.
Although inflation seems to have peaked, the prices of essential items will continue to rise, adding to bills that have in many cases doubled since last year. Household energy spending will jump by a record £900 to an average £2,450 in 2023, up from £1,550 this year.
Families on the lowest incomes will get some protection from the cost of living crisis after the government raised the national living wage and benefit levels by about 10%.
However, Bell said: “This will be swamped by shrinking pay packets, a record £900 rise in energy bills, tax bills for the typical household rising by £1,000, and millions seeing four-digit increases in their mortgage bills.”
A separate study by accounting firm PwC and credit app TotallyMoney found that 8.9 million adults were under severe financial stress after they reported needing to use overdraft facilities to cover everyday spending, such as groceries.
Record levels of unsecured debt and rising interest rates amid the cost of living crisis were the chief reasons families were struggling and may find it difficult to keep up with repayments on their borrowing in 2023. The study estimated that unsecured debt, such as personal loans, now stands at more than £400bn, or a record high of £16,200 for each UK household.
Isabelle Jenkins, leader of financial services at PwC UK, said: “Unaffordable lending and borrowing can cause real harm to individuals and society, and vulnerable consumers can be disproportionately affected.”