The UK has fallen into a recession which will last more than a year and push half a million people out of work, while households face the biggest fall in living standards since records began.
The government spending watchdog forecast a 7% drop in household incomes over the next two years, capping what one of its officials described as a “dismal decade” for growth.
There will be the biggest fall in living standards since records began, with inflation “tipping the economy into a recession lasting just over a year”, the Office for Budget Responsibility said, as it released updated forecasts to accompany chancellor Jeremy Hunt’s autumn statement.
The drop in household spending power will be so acute it will wipe out the past eight years of growth, as wage rises fail to keep pace with inflation and interest rates rise. It will effectively turn the clock back to 2013, the OBR said.
It also marks only the third time since the mid-1950s in which there will be back-to-back years of falling living standards. The last time was in the aftermath of the global financial crisis.
The years since then had been “a dismal decade for UK growth”, said Prof David Miles, a member of the OBR’s budget responsibility committee, adding that in the “very near term”, it was going to be “a year of squeezed budgets for households”.
The economy will shrink by 2%, driving up unemployment by 505,000 by the second half of 2024, the OBR said. GDP will only reach its pre-pandemic level by the end of the same year.
“The medium-term fiscal outlook has materially worsened since our March forecast due to a weaker economy, higher interest rates, and higher inflation,” the OBR said in its latest update on the outlook for the economy and public finances published alongside Jeremy Hunt’s autumn statement.
There will be further pain for homeowners, with house prices set to fall 9% by 2024, the same year in which the next general election is expected to be held, while the average interest rate on mortgage debt will peak at 5%. Unemployment also is set to peak in the second half of 2024.
While household incomes are squeezed, taxes will rise to 37.1% of GDP by 2027-28, their highest sustained level since the second world war. This year, total taxes raised will top £1tn for the first time, after Hunt’s decision to expand the windfall tax.
Overall, the spending watchdog said government borrowing was likely to be higher than forecast in March this year, but would fall relative to economic output from 2024-25 onwards.
Under the plans announced on Thursday, a future government will face “a very large single fiscal event” in 2027-28 when, according to plans set out today, the Treasury will cut spending and increase taxes by £61.7bn, said Andy King, a member of the OBR’s budget responsibility committee.
It would be a “pretty similar number” compared with the 2010 austerity budget, when compared with the size of economies at the time, albeit against a different economic backdrop, King said.
While a fiscal crunch could be delayed until after a general election, some impact from the recession would be felt keenly in the run-up to polling day, according to the OBR’s calculations.
The OBR was embroiled in a political storm around Liz Truss and Kwasi Kwarteng’s mini-budget, which went ahead in September without releasing forecasts from the watchdog.
It said on Thursday, in light of the furore, that its forecast “has been unusual in both the time it took to produce and the process leading to its publication”.
The omission of independent economic and borrowing forecasts triggered a crisis in the bond markets, with a sell-off in UK government debt, known as gilts, as investors felt the government had made a deliberate decision to avoid independent scrutiny of their spending plans.
The pair met with Richard Hughes, OBR chair, in the aftermath of the mini-budget in an attempt to cool markets.
Ahead of the autumn statement, the watchdog said: “This forecast process has been unusually uncertain, with various changes to both internal and public deadlines for forecast rounds, policy changes and publication dates.” The document it produced was also far shorter than usual and noted that there have been “five fiscal events since March”.