2022 is set to the ‘year of the squeeze’, with real wages set to be no higher next Christmas than today, and families face a typical income hit of around £1,200 a year from April as a result of tax rises and soaring energy bills, according to new Resolution Foundation research published today (Wednesday).

The Foundation’s latest quarterly Labour Market Outlook looks ahead to how workers and families will be affected by the big economic shifts in 2022.

It notes that while Omicron is rightly at the forefront of people’s minds at present, it is unlikely to be the defining economic feature of next year as the wave is expected to be relatively short-lived.

Instead, 2022 will be defined as the ‘year of the squeeze’ for family budgets, with inflation set to peak at 6 per cent in Spring 2022 (its highest level since 1992) and pay packets stagnating as a result.

The report notes that real wage growth was flat in October, almost certainly started falling last month, and is unlikely to start growing again until the final quarter of 2022. As a result, real wages are on course to be just 0.1 per cent higher at the end of 2022 than at the start.

By the end of 2024, real wages are set to be £740 a year lower than had the UK’s (already sluggish) pre-pandemic pay growth continued. This shows just how much the Covid-19 crisis has scarred pay packets across Britain, says the Foundation.

The peak of the squeeze will come in April, says the report, which risks being a cost of living catastrophe as energy bills and taxes rise steeply overnight. The cap on energy bills is expected to rise by around £500 a year. Coupled with a further £100 rise to recoup the costs associated with energy firm failures, this could mean a typical energy bill rising by around £600 a year.

This rise will fall disproportionately on low-income families as they spend far more of their income on energy. The share of income spent on energy bills among the poorest households is set to rise from 8.5 to 12 per cent – three times as high as the share spent by the richest households.

Higher-income families will instead by disproportionately affected by rising tax bills in April. The average combined impact of the freeze to income tax thresholds and the 1.25 per cent increase in personal National Insurance contributions is £600 per household. For families in the top half of the income distribution, the NI rise alone will raise tax bills by £750 on average.

The Foundation says the scale of this April cost of living catastrophe, at a time of falling real wages, means the government is likely to have to act.

While there is little the Chancellor can do in the short-term to tame inflation or boost wage growth, the welcome 6.6 per cent rise in the National Living Wage next April should protect the lowest earners from shrinking pay packets.

The top priority for further action should be tackling rising energy bills, says the Foundation. Options for doing so include:

  • Reducing the size of the energy cap rise directly. Compensating energy suppliers for a six month, £200 reduction would cost around £2.7 billion, or £450 million if focused on lower-income households on Universal Credit.
  • Extending the time period over which the costs of supplier failures are recouped, with the £100 bill rise reflecting a policy of recouping costs over a single year.
  • Moving environmental and social levies currently added to electricity bills into general taxation, saving households £160 per year and costing up £4.5 billion per year.
  • Extending and increasing the Warm Homes Discount.

Torsten Bell, Chief Executive of the Resolution Foundation, said:

“2022 will begin with Omicron at the forefront of everyone’s minds. But while the economic impact of this new wave is uncertain, it should at least be short-lived. Instead, 2022 will be defined as the ‘year of the squeeze’.

“The overall picture is likely to be one of prices surging and pay packets stagnating. In fact, real wages have already started falling, and are set to go into next Christmas barely higher than they are now.

“The peak of the squeeze will be in April, as families face a £1,200 income hit from soaring energy bills and tax rises. So large is this overnight cost of living catastrophe that it’s hard to see how the Government avoids stepping in.

“Top of the Government’s New Year resolutions should be addressing April’s energy bills hike, particularly for the poorest households who will be hardest hit by rising gas and electricity bills.”