Average incomes will fall by more than £2,000 this financial year, the Resolution Foundation has warned.
It predicts that a typical disposable income for a working-age family will fall by 3% over this financial year, and 4% in 2024, meaning the UK is halfway through a two-year cost-of-living crisis.
The 4% drop in 2023-24 would be the largest single-year fall in income since 1975, the Resolution Foundation said, and bigger than any drops experienced during the financial crisis.
Although lower-income households will be less affected by higher mortgage bills and interest rates, real incomes among the poorest fifth of households will fall by 5%.
Incomes in the top 5% of earners will, however, rise by 4% between 2021-22 and 2023-24, it predicts, thanks to rapid growth in investment income.
Pay in the cost-of-living crisis
The Resolution Foundation predicts that the cost-of-living crisis should ease in 2024, but real-terms wages are not likely to return to the same level as the first quarter of 2022 until the end of 2027.
Even in the 2027-28 financial year, typical incomes are not likely to be back to their pre-pandemic level.
The think tank has recommended that the government link its cost-of-living payments to those in receipt of benefits or state pension, and that it encourages greater take-up of means-tested and disability benefits.
It also suggests the government reviews a number of social security policies including the two-child limit for child benefit payments.
In a survey run by the foundation in November, 45% of respondents were quite worried or very worried about their energy bills over the winter months, rising to 63% of those in the bottom fifth of incomes.
Almost a third of respondents in the bottom quintile in income were not confident about their finances over the next few months.
Lalitha Try, a researcher at the Resolution Foundation, said: “The crisis is already taking its toll on families, with over six million adults reporting they are going hungry as a result.
“Low-income families have been hit hardest by soaring energy bills and food prices, and are most likely to have seen both their financial circumstances and their health deteriorate.
“The government has rightly prioritised them in its crisis response – with support targeted at vulnerable households and tax rises hitting better-off families.”
Ministers must now look at how they can support families in the longer term, added Dr Jennifer Dixon, chief executive of the Health Foundation, which supported the research.
“Action to tackle the cost of living must recognise both immediate and longer-term health risks created by growing financial insecurity and debt,” she said.
“The government must act now and craft an intelligent strategy targeting those at greatest risk to avoid hampering the nation’s prosperity in years to come.”
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