Recession to wipe out 8 years of rising living standards, Treasury watchdog warns

The recession will leave Britons worse off by the next election than they were a decade earlier, the Treasury watchdog is warning after the autumn statement.

The Office for Budget Responsibility (OBR) concludes Jeremy Hunt’s £55bn package of spending cuts and tax hikes will succeed in getting rising government debt under control.

But it warns that even £100bn of spending – including holding down energy bills for a further year from April – only “cushions the blow of higher energy prices” in part.

“The economy still falls into recession and living standards fall 7 per cent over two years, wiping out eight years’ growth,” the OBR’s outlook states.

It expects unemployment to rise by 505,000 from 3.5 per cent, peaking at 4.9 per cent in the third quarter of 2024 – as the UK is expected to go to the polls.

Paul Johnson, the head of the respected Institute for Fiscal Studies, described the conclusion as “simply staggering numbers” – warning incomes would be “down to 2013 levels”.

The OBR also concludes that more of GDP – 37.1 per cent – will be taken in taxes than at any point since the Second World War, a move certain to anger many Conservative backbenchers.

And, although debt will be falling within 5 years, it is still forecast to be 99 per cent of GDP and “roughly £400bn higher than forecast in March and interest costs close to historic highs”.

Rising interest rates has forced up the cost of servicing government debt to more than £100bn and swallow up 8.5 per cent of revenue by 2027 – up from less than 5 per cent, pre-Covid, the OBR says.

House prices are forecast to fall by 9 per cent over the next 2 years and remain below their current level over the next five years.

But interest rates are now expected to peak at 5 per cent in the second half of 2023, not the 6.2 per cent peak expected after September’s disastrous mini-budget.

The watchdog has also slashed its forecast for business investment, which will hit Mr Hunt’s hopes of finding elusive economic growth by dragging down productivity.

Spending on the likes of factories and new equipment isexpected to shrink by more than GDP during next year’s recession – and remain 8.8 per cent below March’s forecast by the start of 2027.