UK Disposable Income Growth Forecast to Stagnate Amid Tax and Welfare Changes

New projections reveal slight increases in disposable income overshadowed by rising taxes and welfare cuts that may stall living standards.

UK households are anticipated to see a modest rise in disposable income over the coming years, yet projections indicate that living standards are likely to stagnate as businesses adjust to higher taxes and reductions in welfare measures.

According to the NHS Spring Statement, delivered by Chancellor Rachel Reeves to Parliament, households may be approximately £500 better off annually by 2029 compared to earlier forecasts.

The Office for Budget Responsibility (OBR), the government's official forecaster, has indicated that real household disposable income (RHDI) per capita is expected to increase at a rate of about 0.5% each year from 2025 to 2030. This forecast reflects an increase from the previous outlook provided in October of the last year.

RHDI, which gauges the effective purchasing power of individuals' income and savings after accounting for inflation, suggests that while there is a projected average income growth, the Chancellor noted that many workers continue to face financial difficulties stemming from the ongoing cost-of-living crisis.

Reeves stated that the new forecasts imply that living standards would rise at a pace double that of the last Parliament.

However, the OBR has warned that the growth in disposable income will not be uniform and will see significant variability across the five-year period.

Growth is predicted to decline sharply from approximately 2.5% in 2024-25 to near-zero growth by 2027-28.

Several elements are contributing to this trend, including projected reductions in wage growth as companies seek to restore profit margins.

Additionally, the burden of increased employer national insurance contributions may be transferred onto employees, further impacting wage growth.

Many workers are also projected to experience fiscal drag, wherein rising salaries could unintentionally push them into higher tax brackets due to unadjusted tax thresholds.

The OBR's findings also emphasize that the rising state pension age, alongside additional welfare spending cuts outlined by Reeves, will further complicate the outlook for living standards.

The Spring Statement indicated cuts to health and disability benefits previously detailed, alongside new welfare spending reductions.

Despite the expected slowdown in growth, a recovery is projected with RHDI growth anticipated to reach an average of 0.75% for the years 2028-29 and 2029-30, largely driven by the end of income tax threshold freezes and projected acceleration in real wage growth.

However, Arnab Bhattacharjee, a research lead at the National Institute of Economic and Social Research (NIESR), expressed skepticism regarding the overall improvement in living conditions.

Bhattacharjee noted that recent wage increases have generally favored higher earners, leaving lower-income households at a disadvantage.

He highlighted that without meaningful initiatives targeting lower-income families, the progress in living standards for working-class individuals and families is likely to remain stagnant.