Household Incomes Expected to Stagnate or Fall in 2025, But Public Services Could Provide Relief

Household Incomes Expected to Stagnate or Fall in 2025, But Public Services Could Provide Relief

Household incomes in the UK are predicted to stagnate or fall in 2025, yet there is a possibility that people may feel better off due to improvements in public services, according to a leading thinktank. The Resolution Foundation’s new measure of “real living standards” incorporates both disposable income and the “in-kind” benefits of public services, highlighting a complex economic outlook for the coming year.

The thinktank’s analysis suggests that while the worst-off 10% of working-age people may experience a 2% decline in disposable income, this could be offset by improvements in public services. According to the Foundation’s calculations, these individuals would be £28 better off overall, thanks to public services. Conversely, the top half of earners may see a 0.4% drop in living standards, equivalent to £140, once the benefits of public services are considered.

Can Public Services Offset Financial Losses for the Poorest?

Mike Brewer, interim chief executive of the Resolution Foundation, commented on the government’s “budget tax-rise gamble,” stating that, “while people may not be better off in purely financial terms, they will feel better off if we can have better, less dysfunctional public services.”

Public services are seen as vital to the poorest households, who are particularly impacted by rising housing costs and increased council tax, as well as real-terms cuts to social security payments. However, these households stand to benefit more from improvements in public services compared to wealthier ones, who rely less on state provisions and benefit less from measures like wage increases.

Brewer added, “If we put a cash figure on the benefits in kind from public services, then the 0.6% real living standards fall for the richest 10th of households is equivalent to a cash hit of £356 per person next year.”

Despite this, he noted that while the government’s targets for rising disposable incomes look promising, the living standards outlook for 2025 is far from optimistic. “Disposable income is likely to fall, and if households are to feel better off, then it will only be if they see the benefits from spending more on public services.”

What Challenges Does Chancellor Reeves Face with Growth and Inflation?

The economic outlook remains uncertain, particularly regarding growth, inflation, and the upcoming spending review. The focus on investment is commendable and could yield long-term benefits, but failure to generate growth could present significant challenges.

Recent figures revealed a 0.1% contraction in GDP in October, following a similar drop in September – marking the first time since the pandemic that the economy has shrunk in two consecutive months. Economists are now concerned about a potential recession, and the Bank of England predicts zero growth in GDP between October and December. Independent forecasts for 2025 suggest modest growth, with the Office for Budget Responsibility predicting a 2% increase in GDP, but other estimates show a more cautious 1.3% rise.

It was noted that the outlook is uncertain, with the possibility that growth might exceed forecasts, but equally, there are risks that things may not improve as expected. A lack of clarity over potential actions if growth falters leaves questions about how the government would handle a downturn.

How Will the Spending Review in June Address Pressures on Public Services?

Another significant hurdle for Chancellor Reeves will be the spending review, expected in June, where government departments will be asked to find savings of 5%. There are numerous demands for additional spending, particularly in sectors like the NHS, climate change, and justice, as public services face mounting pressures.

The spending review will be challenging, as the allocations for the current and upcoming years have already been set, but the years beyond 2025 will see tighter spending plans. Reconciling the competing demands for more spending will be difficult. There has been criticism that much of the extra spending has not been targeted toward growth. For example, significant funding has gone to the NHS, climate change, and justice, areas where while there is a strong case for investment, they are not typically seen as the most obvious drivers of economic growth.

How Does the Treasury Defend Its Economic Strategy?

In response to concerns about the future economic strategy, a Treasury spokesperson emphasized the government’s commitment to addressing long-standing economic issues and improving the financial well-being of working people. “The challenge we face to fix our economy and properly fund our public finances after 15 years of neglect is huge. But this is only fueling our fire to deliver for working people. The budget and our plan for change will deliver sustainable long-term growth, putting more money in people’s pockets through increased investment and relentless reform.”

The spokesperson reaffirmed that the government is focused on long-term solutions, highlighting the importance of public service reform and continued investment to ensure future prosperity.

Conclusion

As 2025 approaches, the UK’s economic outlook is full of uncertainties. While household incomes are expected to stagnate or fall, particularly for the poorest households, the government hopes that improvements in public services will provide some relief. The outcome will largely depend on whether Chancellor Reeves can successfully navigate the challenges ahead, including slow economic growth, tight public finances, and the competing demands for increased spending. Whether the government’s plan will ultimately deliver long-term benefits remains to be seen.

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