UK household disposable income fell below pre-pandemic levels in 2023

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UK household disposable income dropped below pre-pandemic levels in the fiscal year to March 2023 even as state support helped reduce inequality, underlining the impact of rising prices and higher interest rates on personal finances.

Median household disposable income was £34,500 in the fiscal year ending March 2023, down 2.5 per cent on the previous year and down from £34,700 in the year to March 2020, the Office for National Statistics said on Tuesday.

Disposable income — defined as the inflation-adjusted amount of money households have available for spending and saving after taxes — fell by an annual average of 0.3 per cent between 2020 and 2023, the ONS said, although it rose by 0.8 per cent a year between 2013 and 2023.

Disposable income inequality declined to 33.1 per cent in the year to March 2023 from 35.5 per cent the previous year on the back of government measures to ease the cost of living crisis.

The figures highlight the impact of the recent surge in inflation and reflect the rise in mortgage rates as the Bank of England increased borrowing costs.

After consumer confidence fell sharply in September, they also underline the challenge facing Sir Keir Starmer’s government to deliver its promise of higher living standards across the country.

Inflation stood at 2.2 per cent in August, well below the 42-year high of 11.1 per cent in October 2022 but above the BoE’s 2 per cent target.

Tomasz Wieladek, chief European economist at investment company T Rowe Price, said the jump in energy costs after Russia’s full-scale invasion of Ukraine in 2022 had led other essential goods and services to rise in price at a time when households were facing higher mortgage costs and consumer debt.

But he added that “the effects would have been much larger” had successive governments not subsidised household energy bills or raised the minimum wage by almost 10 per cent.

Britain’s poorest households benefited from a 2.3 per cent increase in disposable income to £16,400 in the past year, helped by government support measures, the ONS said.

By contrast, disposable income among the richest households fell 4.9 per cent to £68,400, while there was a 2.5 per cent fall to £34,500 across the entire population.

Despite lower income inequality, the richest and poorest one-fifth of households were worse off than before the pandemic, with their disposable income down 4.3 per cent and 2.4 per cent respectively.

In a letter this month, 17 groups including the Salvation Army warned ministers that many Britons were “resorting to desperate measures” to cope with living costs and higher energy bills this winter.

Chancellor Rachel Reeves on Monday reiterated the government’s commitment to boosting economic growth, striking a more upbeat tone than in previous months and paving the way for more public investment.

She also set out an accelerated timeline on a pledge to roll out free breakfast clubs to every primary school in the UK.

Household disposable income has grown much more slowly since the 2008-09 financial crisis than in past decades, ONS data shows, highlighting the impact of slower growth.

In the 15 years to 2023, median disposable income rose only 7 per cent, compared with a 41 per cent increase in the previous 15 years.

Real wages have been rising since the middle of last year and mortgage costs are falling, helping household finances.

In August, the BoE cut interest rates for the first time in more than four years, leaving them at 5 per cent. Another reduction is expected in November.

Paul Dales, economist at research company Capital Economics, said there would “be an extra drag on real household disposable income” if Reeves raised taxes in the October Budget.

But he added that it was likely “to grow faster [in the year to March 2024] mainly due to inflation having fallen faster than wage growth”.