The Office for Budget Responsibility (OBR), a UK government agency, has forecast that living standards in the UK will fall 7% over two years, wiping out eight years of growth.
As UK finance minister Jeremy Hunt unveiled his Autumn budget statement, the OBR predicted: “In the UK, CPI inflation is set to peak at a 40-year high of 11 per cent in the current quarter, and the peak would have been a further 2½ percentage points higher without the energy price guarantee (EPG) limiting a typical household’s annualised energy bill to £2,500 this winter and £3,000 next winter.
“Rising prices erode real wages and reduce living standards by 7 per cent in total over the two financial years to 2023-24 (wiping out the previous eight years’ growth), despite over £100 billion of additional government support.
“The squeeze on real incomes, rise in interest rates, and fall in house prices all weigh on consumption and investment, tipping the economy into a recession lasting just over a year from the third quarter of 2022, with a peak-to-trough fall in GDP of 2 per cent.
“Unemployment rises by 505,000 from 3.5 per cent to peak at 4.9 per cent in the third quarter of 2024.”
The OBR said over £100 billion of additional fiscal support over the next two years will cushion the blow of higher energy prices – but the UK economy will still fall into recession.
“Over the medium term, around £40 billion in tax rises and spending cuts – in roughly equal measure – offsets higher debt interest and welfare costs and gets debt falling as a share of GDP,” predicted the OBR.
“But at 99 per cent of GDP at the forecast horizon, debt is roughly £400 billion higher than forecast in March and interest costs close to historic highs.”
The OBR added: “The medium-term fiscal outlook has materially worsened since our March forecast due to a weaker economy, higher interest rates, and higher inflation …
“Fiscal policy has been characterised by a high degree of uncertainty since March, first increasing and then reducing the medium-term deficit.”