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How the salary increases of the past eight years are wiped out in the fall budget

British households face a lost decade of wage growth as inflation will erode years of improved living standards.

Rising prices over the next two years will completely wipe out salary increases accumulated over the past eight years, according to the government’s budget watchdog.

The 7 percent fall in living standards will be the largest since records began in the 1950s, depressing spending and sparking a recession that began in the third quarter of this year.

The slump will last just over a year, the Office for Budget Responsibility (OBR) predicted, wiping out the size of the economy by 2 percent.

And if companies feel the pressure, they will start cutting jobs. Unemployment is expected to rise from its current level of 3.6 percent to 4.9 percent in the third quarter of 2024, leaving 505,000 people unemployed.

The gloomy forecasts came as Jeremy Hunt unveiled a £55bn plan to raise taxes and cut spending in a bid to get public finances back on a more sustainable footing.

Economist Thomas Pugh, of accounting firm RSM, said: “The OBR’s forecast paints a bleak picture of the economic outlook for the next two years, with a year-long recession and a record fall in real household income.”

Paul Johnson, director of think tank the Institute for Fiscal Studies, said: “The next two years look bleak in terms of living standards.”

It came as the chancellor announced a series of hidden taxes in an attempt to plug the gaping hole in the state coffers. Britain’s tax burden will now rise to its highest sustained level since World War II.

Mr. Hunt acknowledged that “in the face of unprecedented global headwinds, families, retirees, businesses, teachers, nurses and many others are concerned about the future.”

But he said his efforts to boost the treasury would lead to “a smaller downturn” and were necessary to “give the world confidence in our ability to pay our debts.”

Households’ real disposable income — the amount of cash they have to spend after tax, taking inflation into account — will fall by 4.3 percent in fiscal year 2022/23, the OBR predicted.

This is the largest slide since measurements began in 1956/57. The following year it will fall by another 2.8 percent – only the third time in a row that the standard of living has fallen for two years in a row.

In April 2024, household disposable income will be the lowest since 2014.

Living standards will not return to last year’s levels until 2027/2028, and even then remain more than 1 percent below pre-pandemic levels.

While wages have risen on average over the past two years, as companies attempted to lure in staff following the pandemic, all of these increases and more have been eroded by the red-hot rise in the cost of living.

Data from this week showed that inflation hit 11.1 percent last month, a 41-year high that was above expectations.

For the full year, inflation averages 9.1 percent. Next year it will remain high for the first half of the year before falling sharply, averaging 7.4 percent.

In the short term, pressure on households will drive down economic output, or gross domestic product (GDP).

The uptick in the pandemic at the start of this year will help mask the onset of the recession, with GDP growing at 4.2 percent in 2022 as a whole. But according to the OBR, the economy will shrink by 1.4 percent next year and by 1.3 percent in 2024.

Mr Hunt said: ‘Inflation is high here, but higher in Germany, the Netherlands and Italy. Interest rates have risen here – but faster in the US, Canada and New Zealand. Growth forecasts have dropped here – but have fallen further in Germany.’

The OBR’s economic forecasts were slightly more optimistic than the Bank of England’s last month, as the watchdog reckons households will stop saving as the recession hits and simply splash their cash.

David Miles, from the OBR, said: “The UK household sector savings rate will fall very substantially, perhaps even close to zero, as it was very high in the unusual circumstances of 2020 and 2021 during lockdowns.

“We think those who can do that are likely to recoup excess savings they made at the time. That means the projection we have for consumer spending is a lot stronger than the Bank of England’s.’

Now the positive news: Inflation ‘will fall below two percent in 2024’

Inflation has peaked and will be back below the 2 percent target by 2024, the budget watchdog predicted yesterday.

Cost-of-living increases — currently at a record 11.1 percent in 41 years — will remain high through the first half of next year, according to the Office for Budget Responsibility (OBR).

But after that it will fall sharply, next year as a whole on average 7.4 percent and in 2024 only 0.6 percent. food.

Deflation is usually bad news for an economy because it indicates a weakness in a country’s financial health, but it would be a relief for households that have endured two years of declining living standards.

Inflation will pick up again to 1.7 percent by 2027, according to the OBR. Chancellor Jeremy Hunt added: ‘High inflation is the enemy of stability. The OBR confirm that our plans will ease the recession and reduce inflation.”

The Energy Price Guarantee, introduced by former Prime Minister Liz Truss and extended yesterday by Mr Hunt, has kept inflation in check by limiting the typical annual energy bill to £2,500 this winter and £3,000 from April. Without it, peak inflation could have exceeded 13.5 percent. The Bank of England has raised interest rates to bring inflation under control. This should encourage saving rather than spending, putting pressure on prices.

But it also makes borrowing more expensive for households and the government, which has to pay down its £2.4 trillion debt.

The Bank has raised its base rate to 3 percent, the highest point in 14 years, and is expected to raise it to 3.5 percent next month.

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