Britain’s poorest households have suffered a £4,500 hit to their finances since the start of the Covid pandemic, according to a report indicating that those on the lowest incomes have borne the brunt of the cost of living crisis.
Highlighting a dramatic fall in living standards since Boris Johnson’s election landslide four years ago, the National Institute of Economic and Social Research (NIESR) thinktank said soaring costs for energy, food and other basic essentials had hit those most badly off the hardest.
For the poorest half of households in Britain, it said living standards would be as much as 20% lower this year compared with 2019-20, after taking account of inflation, and would not return to pre-pandemic levels until 2027.
The intervention comes after the payment of the government’s final £299 cost of living support instalment for 8 million people on means-tested benefits this week, in the last of three payouts worth £900 in total.
However, NIESR warned the support remained insufficient to overcome the hit to living standards inflicted when the easing of Covid restrictions and Russia’s invasion of Ukraine drove up inflation at the fastest rate in four decades.
The thinktank said living standards for the poorest tenth of families, after adjusting for inflation, remained 18% below 2019-20 levels even after accounting for government support – delivering a financial blow worth £4,500 in today’s prices.
“As a proportion of their budget, they spend a lot more on energy, food and housing [than wealthier households], so they took more of the brunt of the shock,” said Adrian Pabst, NIESR’s deputy director for public policy.
“There are deep-scarring effects from these cumulative shocks, and that is despite welcome and significant policy intervention,” he added.
NIESR’s news comes after Rishi Sunak claimed in an interview with the BBC on Tuesday that the burden on households was “starting to ease” after a fall in inflation from more than 10% a year ago to 4% in December. Falling inflation does not mean prices are coming down, only that they are rising less quickly.
In its latest quarterly health check on the economy, NIESR forecast that inflation would drop to as low as 1.2% by the spring, which could spur the Bank of England to cut interest rates from as early as May. Threadneedle Street has a target set by the government to steer inflation towards 2%.
A combination of lower inflation and sustained wage growth should mean British households “start to feel better off” this year, the thinktank said, forecasting a rise in living standards of about 1.5% on average over the next two years.
However, it warned this masked stark differences between different households and parts of the country.
“With low economic growth and high costs of energy, food and housing, living standards are recovering slowly and not returning to pre-pandemic levels for another three years,” Pabst said.
After more than a decade of wage stagnation for workers, “you’re basically talking about 15-20 years of no real improvement in living standards” since the 2008 financial crisis, he added.
The thinktank, which is Britain’s oldest independent research institute, said the priority for the government ahead of the general election would be to boost spending on infrastructure, rather than tax cuts.
Stephen Millard, NIESR’s deputy director for macroeconomic modelling and forecasting, said he expected the government to use improvements in the strength of public finances for tax cuts. “Hopefully, our message has come across that we would not be overly thrilled about that,” he said.
“There is a desperate need for increased public and private investment if higher growth is to be restored.”
A Treasury spokesperson said: “As this report acknowledges, the UK economy is beginning to turn a corner thanks to the decisive action we’ve taken to tackle high inflation.
“But we know the job isn’t done, which is why we’ve supported households with £3,700 between 2022 and 2025. Wages have been rising faster than prices for the last five months, millions of low-paid workers will get a record increase through the national living wage from April and the average worker will save £450 this year thanks to our national insurance cut last month.”