NIESR’s economic forecasts are almost dystopian – they demand action from government

The National Institute of Economic and Social Research (NIESR) has been getting a lot of attention with its latest missive because it is an A-list think tank and its latest predictions are dystopian indeed.

We’re not quite talking the Hunger Games here, but hunger is appropriate given the number of households without savings is “set to double to 5.3 million by 2024”. This means at least 2.6 million of them are going to see what little they have set aside to get them through the current crisis wiped out before its end.

There’s more: average real household disposable incomes are, NIESR warns, set to fall by 2.5 per cent in 2022 and will remain more than 7 per cent below the pre-Covid trend beyond 2026.

And there’s (still) more: the UK economy will enter a recession in this quarter, remaining there until the first quarter of 2023. This, combined with rising prices and falling real incomes, will hit millions of vulnerable households.

Economic forecasters of this stature are apt to qualify their predictions with ifs, and maybes and buts. The language is typically cautious and dry. But NIESR’s press release goes straight for the jugular like the Big Bad in a yakuza movie.

Even if things don’t turn out as badly as its forecasts suggest they will, they still look grim and its forcefully expressed argument that the government must provide assistance to the most vulnerable as a matter of urgency is well made.

Tory tax cuts, promised in different forms by Liz Truss and Rishi Sunak, the dismal duo contending for the party leadership, will inevitably benefit the relatively well-off the most.

The real need – and that need is desperate – is among the poorest and most vulnerable who don’t pay much, if any tax, and face a series of horrible dilemmas of which “heat or eat” is just one.

NIESR has already called for a universal credit uplift of £25 per week “for at least six months” from October to March. That would cost around £1.3bn. However, money deployed to keep families form starving is money well spent. And it really is that simple.

It also urges an increase in the energy grant from £400 to £600 for 11 million low-income households, at a total cost of £2.2bn. And money deployed to keep families from freezing is also money well spent.

We can debate the call to “turn some of the levelling up rhetoric into reality” by doubling support for the Towns Fund to £9.6bn and pushing the capital of the UK infrastructure bank up to £50bn. Levelling up is still more of a slogan than a policy, and some of the announced projects are the opposite of money well spent.

But the first couple of suggestions would be a must for anyone in government with a scintilla of compassion. It is unfortunate indeed that that does not appear to include the incumbents.

As the Bank of England prepares to announce its decision on interest rates, with a high likelihood of a 0.5 per cent increase coming, it is worth noting that NIESR thinks inflation, as measured by the official Consumer Prices Index (CPI), will top out at “close to” 11 per cent in the final three months of the year. Some think it will be worse than that.

However, that is just the official measure. The institution thinks that the Retail Prices Index (RPI), an older measure, which some statisticians intensely dislike and argue is outdated and inaccurate, could hit 17.7 per cent.

The problem here is that RPI still matters. It influences the price of train tickets, student loans, and mobile phone contracts, for example. People who purchase or hold these lose out badly through its (questionable) continued existence.

It should be noted that the RPI adjustment tends to be applied at a particular point in time – so not necessarily when it spikes. But the risk of that happening is there so long as this dated measure is still used.

The government has already had to intervene to say it will cap student loan interest at 7.3 per cent in September, down from the horrid looking 12 per cent graduates faced at a time when base rates will still be hovering around 2 per cent. As a point of comparison, it’s still possible to find mortgage deals in the 3.5 per cent range if you hunt around.

The use of RPI to calculate the interest on these loans in the first place was a dirty trick indeed.

There are, inevitably, also winners from the RPI anomaly too: holders of final salary pension schemes, and those lucky enough to have got their hands on certain index-linked government debt (the tax payer is a very big loser from the surge in RPI).

But their gains are hard to justify given its flaws and it is mercifully due to be phased out without compensation for the losers in favour of the CPIH – the Consumer Prices Index including owner occupiers’ housing costs – which the ONS thinks is a much better measure.

CPIH, like RPI, seeks to factor in housing costs. But the calculation is different, and it generally comes out lower than RPI, just as CPI does.

Sunak, while chancellor, announced 2030 as the date for scrapping RPI, although the option to make the switch in 2025 was on the table.

That decision now looks questionable given the distortion that this “poor measure” ballooning to close to 18 per cent – a level not seen since 1980 – may cause.