Business
UK faces biggest fall in living standards
The UK faces its biggest drop in living standards on record as the surging cost of living eats into people’s wages.
The government’s forecaster said that household incomes – once rising prices were taken into account – would dive by 7% in the next few years.
It also expects the number of people who are unemployed to rise by more than 500,000.
It came as the chancellor said the UK was already in recession and set to shrink further next year.
But Jeremy Hunt said his Autumn Statement – which unveiled £55bn of tax rises and spending cuts – would lead to a “shallower downturn” with fewer jobs lost.
Paul Johnson, director of the Institute for Fiscal Studies think tank, said: “Surging global energy prices have made the UK a poorer country. The result is an OBR (Office for Budget Responsibility) forecast that the next two years will see the biggest fall in household incomes in generations.”
Energy and food bills have shot up due to the war in Ukraine and pandemic, and are squeezing household budgets.
Inflation – the rate at which prices rise – is at a 41-year high, which the OBR says is dragging on the economy.
The forecaster said price rises were likely to peak at 11% in the final three months of this year, thanks largely to the government’s energy price guarantee scheme which limits bills.
However, it said inflation would still “erode real wages and reduce living standards” this year by the biggest margin seen since 1956, when records began.
It expects household incomes when adjusted for inflation to fall back to the levels they were in 2013. It will then take six years for them to recover, although they will still be “over 1% below pre-pandemic levels” by 2028.
Jasmine Hurley and Peter Fletcher are concerned about the cost of livingJasmine Hurley, 18, and Peter Fletcher, 22, moved to Gloucester about a month ago and are living with Jasmine’s mum.
Peter, who works in a restaurant as a waiter, says it has got harder to save money and he is worried.
“It’s gone from being able to save a few hundred every month to, can I save £50 a month?” he told the BBC.
“If nothing changes this is going to get worse until either we crumble, or something changes.”
Jasmine has finished school and is looking for a job. She feels upset about having to cut back on things and says the future feels bleak.
“If I want to buy a house, it’s going to be impossible. They need to cut down on house prices, it’s affecting all of us – especially working class people.”
This is likely to be a relatively shallow recession for the economy as a whole – but for households, it will mean the wipeout of gains in living standards, a return to 2014.
It’s a consequence of multiple factors. Looming large has been a spike in energy prices and food costs. The government support package has cushioned only part of the blow inflicted by the former.
Then there’s the policy response to soaring inflation: increases in interest rates from the Bank of England, designed to reduce price pressures by squeezing finances. The official forecasts reckon that house prices will fall by more than 5% in 2024 as buyers feel the pinch.
And there are the tax rises, targeted towards the better off, which will slowly eat into their fortunes. The tax man is set to take the biggest slice of the nation’s income since World War Two.
Hard-pressed employers, too, are granting pay rises that are failing to match the cost of living – and ultimately, the Office for Budget Responsibility predicts, they will cut over 500,000 jobs.
It’s a perfect storm. Households may be far from clear of it by the time the general election approaches in 2024.
Recession warning
Along with high inflation, the OBR says the UK is also struggling with rising interest rates, which the Bank of England has put up to 3% to try to battle inflation.
House prices are also forecast to fall by about 9% over the next two years as a result of higher mortgage costs.
The OBR thinks that, taken together, this will tip the economy into a recession “lasting just over a year” as consumers spend less and businesses cut investment.
It expects the UK economy to shrink by 1.4% in 2023 before growth gradually picks up again.
The forecaster also thinks the unemployment rate will rise from 3.6% today – near a record low – to 4.9% in 2024 before falling back.
A recession is defined as when a country’s economy shrinks for two three-month periods – or quarters – in a row.
Typically companies make less money, pay falls and unemployment rises. This means the government receives less money in tax to use on public services.
Mr Hunt hopes his Autumn Statement will help restore the UK’s economic credibility after the controversy of September’s mini-budget.
Investors were spooked by the mini-budget’s promise of large, unfunded tax cuts, with the pound falling to a record low and government borrowing costs shooting upwards.
Mr Hunt, who has scrapped most of his predecessor’s plans, promised on Thursday to bring government debt down as a percentage of economic output within five years under a new fiscal rule, not three years as previously planned.
He added that the budget deficit – the difference between what the government brings in in taxes and what it spends – would be brought below 3% of output (or gross domestic product) within five years.
On Thursday, the pound fell slightly against the US dollar after Mr Hunt delivered his statement. The government’s borrowing costs remained broadly unchanged.
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The prospective new owner of Royal Mail has said he will not walk away from the requirement to deliver letters throughout the UK six days a week, as long as he is running the service.
“As long as I’m alive, I completely exclude this,” Czech billionaire Daniel Kretinsky told the BBC.
Mr Kretinsky has had a £3.6bn offer for Royal Mail accepted by its board.
Shareholders are expected to approve the deal in the coming months, but the government also has a say over whether it goes ahead.
Currently the Universal Service Obligation (USO) requires Royal Mail to deliver letters six days a week throughout the country for the same price. But questions have been raised over whether the service could be reduced in the future.
In an exclusive interview with the BBC, Mr Kretinsky also said he would be willing to share profits with employees, if given the go-ahead to buy the group.
However, he appeared to reject the idea of employees having a stake in Royal Mail, which unions have called for in exchange for their support.
The Royal Mail board agreed a £3.6bn takeover offer from Mr Kretinsky in May for the 500-year-old organisation, which employs more than 150,000 people. Including assumed debts, the offer is worth £5bn.
But because Royal Mail is a nationally important company, the government has the power to scrutinise and potentially block the deal.
As well as keeping the new government on side, Mr Kretinsky also faces the task of convincing postal unions that the proposed deal will benefit employees.
The USO is a potential sticking point for both the government and unions.
Royal Mail is required by law to deliver letters six days a week and parcels five days a week to every address in the UK for a fixed price.
How well this has actually been working in practice is a different matter. Ten years ago, 92% of first class post arrived on time. By the end of last year it was down to 74%, according to the regulator Ofcom.
Last year the regulator fined Royal Mail £5.6m for failing to meet its delivery targets.
Royal Mail has been pushing for this obligation to be watered down. It wants to cut second class letter deliveries to every other weekday, saying this will save £300m, and lead to “fewer than 1,000” voluntary redundancies.
‘Unconditional commitment’
Mr Kretinsky has committed in writing to honouring the USO, but only for five years.
And after that, in theory, the new owners could just walk away from it.
However, Mr Kretinsky told the BBC: “As long as I’m alive, I completely exclude this, and I’m sure that anybody that would be my successor would absolutely understand this.
“I say this as an absolutely clear, unconditional commitment: Royal Mail is going to be the provider of Universal Service Obligation in the UK, I would say forever, as long as the service is going to be needed, and as long as we are going to be around.”
Mr Kretinsky added that the written five-year commitment was “the longest commitment that has ever been offered in a situation like this”.
Another potential stumbling block for the deal, however, is how the company will be structured.
Unions would like to see the company renationalised, but Dave Ward, general secretary of the Communication Workers Union (CWU), told the BBC that would be “difficult in the current political and economic environment”.
Instead, what the CWU is pushing for is “a different model of ownership” – that is, where the employees part-own the business.
To get its support for the takeover, the union wants employees to share ownership of the company, along with other concessions including board representation for workers.
It says profit sharing is “not going to be enough to deliver our support and the support of the workforce”.
If the union doesn’t get what it wants, it won’t rule out industrial action, Mr Ward said. Its members went on strike in 2022 and 2023.
Although Mr Kretinsky said he is “very open” to profit sharing, he is not in favour of shared ownership.
“I don’t think the ownership stake is the right model,” he said. “The logic is: share of profit, yes, [but an] ownership structure creates a lot of complexity.
“For instance, what happens if the employee leaves? He has shares, he is leaving, he is not working for the company, he [still] needs remunerating.”
Mr Kretinsky said he didn’t want to create “some anonymous structure” but instead “remunerate the people who are working for the company, and creating value for the company”.
The union is also concerned about job losses and changes to the terms and conditions of postal workers’ contracts.
Mr Kretinsky has guaranteed no compulsory redundancies or changes in terms and conditions but only until 2025.
“If we are more successful, and we have more parcels to be delivered, we need not less people, but we need more people,” he said. “So really, job cuts are not part of our plan at all.”
He said if the management, union and employees work together, “we will be successful”.
Another concern is the potential break-up of the business.
The profit for Royal Mail’s parent company last year was entirely generated by its German and Canadian logistics and parcels business, GLS. Royal Mail itself made a loss.
Mr Kretinsky has promised not to split off GLS or load the parent company with excessive debt, although borrowings will rise if the deal goes through.
But he has a way to go to convince the CWU.
“I can’t think of any other country in the world that would just just hand over its entire postal service to an overseas equity investor,” Mr Ward of the CWU said.
However, Mr Kretinsky said that the postal unions “do understand that we are on the same ship, and that we need this ship to be successful, and that if we are there, we don’t have any real problems to deal with, because the sky is blue, and it’s blue for everybody.”
The union cannot stop this deal but the government can block it under the National Security and Investment Act.
Business Secretary Jonathan Reynolds has said he will scrutinise the assurances and guarantees given and called on Mr Kretinsky to work constructively with the unions.
Mr Kretinsky may say that he and the unions are ultimately on the same ship but, as things stand, they are not on the same page.
Who is Daniel Kretinsky?
Daniel Kretinsky started his career as a lawyer in his hometown of Brno, before moving to Prague.
He then made serious money in Central and Eastern European energy interests.
This includes Eustream, which transports Russian gas via pipelines that run through Ukraine, the Czech Republic and Slovakia.
He then diversified into other investments, including an almost 10% stake in UK supermarket chain Sainsbury’s and a 27% share in Premier League club West Ham United.
The Czech businessman is worth about £6bn, according to reports.
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