Cost-of-living ‘catastrophe’ looms in 2022 as soaring bills and taxes blow £1,200 hole in household budgets

Families face a cost-of-living ‘catastrophe’ next year as soaring energy bills and tax hikes slash household budgets by £1,200, economists have warned.

Real wages are already falling as the end of 2021 approaches, and spending power is set to stagnate next year as inflation jumps to 6 per cent in the spring – its highest level in almost three decades.

By the end of 2024, real wages are set to be £740 a year lower than if the UK’s already sluggish pre-pandemic pay growth had continued, a report from the Resolution Foundation said.

Spiralling living costs will cancel out average pay rises in 2022, which is set to be the “year of the squeeze”, characterised by higher taxes and almost zero growth in household earnings, according to the report.

April is expected to be a crunch point, when consumers are hit with huge rises to gas and electricity bills at the same time as a hike in national insurance contributions.

Bills are expected to jump by £600, but the foundation said that even this may be an underestimate. Other experts have forecast the government’s energy price cap will jump by more than £700 to around £2,000 a year for the average household, as suppliers pass on the cost of record-breaking wholesale gas prices.

Around £100 of the increase will cover costs for more than two dozen supplier failures this year.

Labour’s Jonathan Ashworth, the shadow work and pensions secretary, said: “Heating bills are going through the roof, punishing tax rises are on the way, wages are stagnating, universal credit cuts have hit struggling families hard. All while prices in the shops are rising, and inflation risks eroding the value of savings and pensions.”

The report warns that, while Omicron will cause “huge disruption” to firms and public services in early 2022, a cost-of-living crisis will soon become the most pressing economic issue facing the country.

Poorer households will be hit hardest by sharp rises in bills, and problems will be “so large, widespread and government-policy-related” that ministers will be forced to act, the foundation said.

Real wages are on course to be just 0.1 per cent higher at the end of 2022 than at the start, with few signs of improvement over the longer term.

Jill Rutter, senior research fellow at UK in a Changing Europe, told The Independent that there are few levers for the Treasury to pull in the short term. Instead, the chancellor will be hoping that inflation eases before the Bank of England pushes interest rates up higher, which could dampen down economic growth.

But easing the cost-of-living crunch will require the right kind of wage growth: from productivity gains, rather than workers asking for higher salaries to combat a real-terms income loss.

“What the chancellor will really, really be hoping is that this doesn’t translate into some kind of wage-price spiral,” Ms Rutter said. This is a scenario in which higher wages feed into higher prices, creating the sort of inflationary pressures seen in the 1970s.

“Directly acting on inflation is not very easy,” she added. “The thing they’ll be most worried about is energy bills going up in April, when the energy price cap is raised. That’s why they will be exploring ways of smoothing that.”

Neil Carberry, chief executive at the Recruitment and Employment Confederation, told The Independent that although many firms were upping their offers to attract new recruits, raising wages was a challenge.

“What’s on the mind of employers right now is that your fuel bills are going up, your tax is going up, you know you’re going to have to try to pay more to your people because their own costs are going up and you want to compete. That’s really challenging,” Mr Carberry said.

“It’s going to be exceptionally difficult for employers to raise settlements to the kind of levels that we’re expecting inflation to run at through next year,” he added.

The Resolution Foundation argued that tackling rising energy prices should now be the government’s “top priority”. It recommended reducing the price cap by around £200 and using public funds to compensate suppliers for revenues they will lose as a result.

The measure would cost an estimated £2.7bn, or £450m if it was targeted only at universal credit claimants.

Shifting green levies from people’s energy bills onto general taxation could cut bills by a further £160 a year, the report said. The change is one of several that energy suppliers called for in talks with ministers this week, which have so far failed to produce an agreement.

Suppliers are also urging the government to cut VAT on energy bills, from 5 per cent to zero, and to look at an industry-wide funding scheme that would allow the costs of surging gas prices to be recovered from customers over several years.

The report painted a “stark” picture of the reality facing families and businesses, said Liberal Democrat Treasury spokesperson Christine Jardine.

“Wages are falling in real terms, and things will get worse in April, when the chancellor’s manifesto-breaking tax hikes will further eat into household incomes. People need action now,” she added.

The party is calling for a doubling of the warm homes discount, the restoration of the £20 per week universal credit uplift, and a £4.5bn package of tax cuts for businesses to help them survive.

A government spokesperson said: “We know people are facing pressure with the cost of living - which is why we’re taking £4.bn of decisive action to help.

“This includes reducing the universal credit taper - a tax cut worth over £bn - supporting households with their bills through the Energy Price Cap, Warm Home Discount Scheme, Winter Fuel Payments, Cold Weather Payments, and Household Support Fund, as well as freezing alcohol and fuel duty.”