Britain faces the “terrifying” prospect of the biggest squeeze in living standards for a century, a new report has warned.
An “unprecedented two-decade-long wage depression” looms as roaring inflation will wipe out years of anaemic wage growth by the middle of next year, the Resolution Foundation think tank predicts.
Meanwhile, three million more Britons could be thrust into absolute poverty without further government intervention to combat rocketing living costs.
The dire prediction came as Liz Truss, who is expected to become prime minister next week, said that direct support for families would be only her third priority in responding to the energy price crisis, after tax cuts and action to boost security of supply.
Ms Truss tied her hands on funding for any support bailout for families and companies hit by soaring inflation by pledging “no new taxes” if she succeeds Boris Johnson as expected on Monday.
And she ruled out a windfall tax on gas and oil giants or French-style energy rationing this winter.
The leadership frontrunner insisted she would “absolutely” offer support to businesses hit by massive hikes in energy bills, and said her chancellor – expected to be Kwasi Kwarteng – will “address the issue of household support” in an emergency budget soon after her arrival at No 10.
She later told The Sun she would provide “immediate support to ensure people are not facing unaffordable fuel bills” and be “robust in my approach”.
But she refused to discuss details of her plans, brushing aside reports that she would slash VAT from 20 to 15 per cent as she told the final hustings of the leadership campaign in Wembley: “I’m not ruling things in or out. I’m not sitting here writing a future budget or fiscal event.”
By contrast, her leadership rival Rishi Sunak made clear he was ready to hit companies with a further windfall tax, after imposing a £5bn levy on excess profits in May.
He told the hustings: “I introduced the windfall tax as chancellor and I’m glad I did because it was the right thing to do.
“I don’t actually know if Liz supports or doesn’t support it, but I think it is absolutely the right thing at a time when energy companies are making billions of pounds of profits because of war.
“That’s not right and we should exceptionally tax those and help with people’s bills.”
The Resolution Foundation report factors in £30bn of support announced by Mr Sunak when he was chancellor earlier this year, but still finds that a deep hit to living standards will last until 2024, in the run-up to the next general election.
“Typical households are on course to see their real incomes fall by £3,000 over the next two years – the biggest squeeze in at least a century – while three million extra people could fall into absolute poverty,” said Lalitha Try, a researcher at the Resolution Foundation.
She added that “radical policy action” is required to tackle the problem.
It comes as leading politicians across the political spectrum have called for greater support for households and businesses in order to combat the sharp uptick in energy prices.
The stark figures on living standards are set against a Bank of England forecast for a prolonged recession starting this year and City predictions for inflation to soar as high as 18 per cent from January to April.
If no action is taken by the new No 10 incumbent, typical household incomes are set to fall by 5 per cent this financial year, and 6 per cent the next, the Resolution Foundation said.
It found that the “sheer scale of the living standards catastrophe awaiting us – not just over Christmas, but into next year and beyond” will make further government intervention “all but inevitable”.
Abena Oppong-Asare, shadow exchequer secretary to the Treasury, said the findings showed “just how out of control this cost of living crisis is”.
“Over 12 years of Conservative governments, we’ve been uniquely exposed to the energy crisis because of their decisions to scrap storage, poorly regulate the market and their failure to invest in renewables, nuclear and insulation,” she added.
Both leadership candidates have signalled they would take action of some form, but neither has laid out a detailed plan. The Treasury and the Office for Budget Responsibility have been crunching numbers on a range of possible actions, according to officials.
Outgoing prime minister Boris Johnson told reporters that his successor would “unquestionably” announce more support for struggling households in the weeks ahead.
Conservative leaders in Wales and Scotland said they expected more help for businesses from the new prime minister, set to be revealed next week as either former chancellor Rishi Sunak or current foreign secretary Liz Truss.
Douglas Ross, Tory leader in Scotland, said on Times Radio that businesses face an “extremely difficult time” and that a support package similar in scale to that offered during the Covid-19 pandemic would be required.
“I know businesses are looking at whether they close for the winter and whether they’ll even reopen again,” he said.
Labour’s Ms Oppong-Asare added: “Under this government, our living standards are falling behind other countries, with no action from the government to get out of this crisis.
“Labour’s plan to get a grip on the cost of living crisis will mean households don’t pay a penny more this winter – and our plan for long-term energy security will help protect families in the future too.”
According to the Resolution Foundation, three million people could be added to the 11 million already living in absolute poverty over the next two years. Meanwhile, child poverty could reach its highest level – close to one in three children – by 2026. This would be the highest level since the 1990s.
Alarms have also been sounded about the state of business investment in the UK. Its weak performance has depressed growth in Britain, a problem which was compounded by Brexit, according to a separate report from the Institute for Government (IfG).
However, any new prime minister will need to look beyond tax cuts as a solution, according to Giles Wilkes, report author and IfG senior fellow.
“Low business investment has undermined UK productivity for decades. Chronic uncertainty since the Brexit referendum has made a bad problem much worse. The next chancellor has to make fixing it their number one long-term priority,” Mr Wilkes said.
“Rather than risk tens of billions on a corporate tax bung, their approach should be to get the Treasury to help provide policy stability across government – rather than undermine it with short-term budgets and constant changes in strategy,” he added.
A government spokesperson said: “Countries around the world are grappling with rising prices but we recognise that inflation is causing significant challenges for families.
“We are continuing to support the economy and families through tax cuts and £37bn worth of help for households throughout the year, including direct payments of at least £1,200 for eight million of the most vulnerable households.
“We are making necessary preparations to ensure a new government will have options to deliver additional support as quickly as possible.”