Households are facing a “groundhog year” in 2023, as soaring gas bills and planned tax rises squeeze disposable incomes and 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.
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.
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 should see the back of double-digit inflation, “but it 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. Meanwhile, income tax thresholds have been frozen by the chancellor, Jeremy Hunt, meaning as average pay rises, so will the proportion handed over to the Treasury.
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.
Bell said a decline in inflation over the next six months would improve the outlook for the economy and ease the pressure on policymakers to tighten spending.
The Bank of England, which has increased the cost of borrowing nine times over the last year, is likely to ease back on plans to raise interest rates any further.
And 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.”
The thinktank commissioned a YouGov poll of more than 10,000 people which found that they are four times as likely to think their financial situation has worsened than improved over the past year.
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.”
A Treasury spokesperson said the government was committed to supporting families with children, increasing benefits in line with inflation.
“We also have a plan that will help to more than halve inflation next year, bearing down on the financial pressures that households face, and have already lifted millions of people out of paying tax altogether by raising the tax-free allowances for both income tax and national insurance by more than inflation since 2010,” they added.