Around 1.5 million households across the UK face higher food and energy bills than what they can afford amid a cost of living crisis, according to a think tank.
The National Institute of Economic and Social Research (NIESR) said in its latest UK economic forecast that real income will drop 2.4% and suggested the chancellor Rishi Sunak use some of the reported £20bn ($24.6bn) fiscal windfall to provide emergency support that would cushion this income shock.
“The hardest hit households are facing bills worth more than 90% of their disposable income, in some cases as much as 94%,” Adrian Pabst, NIESR’s deputy director for Public Policy, said.
“That is just food and energy [bills], not accounting for other essentials and certainly not savings. It is a dramatic situation for households across the UK.”
London, Scotland and Northern Ireland account for the highest concentration of households that will be hit the hardest by the cost of living crisis.
With rising prices and higher taxes squeezing household budgets, the NIESR estimate that 11.3 families of lower income are set to lose £4.2bn more than those on median incomes.
“Everyone is losing, but the poorer households are losing more,” Pabst said.
The think tank has warned that “policy is not helping” and that without more targeted intervention, an additional 250,000 households will fall into extreme poverty, taking the total number of households in destitution to surpass 1 million.
Another 500,000 households will face a choice — food or eating.
“Prices will push up bills, drag down demand and increase income inequalities. The big squeeze on budgets will hit the lower-income households hardest who live in some of the most economically and socially deprived parts of the country,” Pabst said.
“To stop an additional 250,000 households from sliding into debt and destitution, the chancellor should instate a £25 per week universal credit (UC) uplift for at least six months.
"And to help the lower-income 11.3 million households that struggle to make ends meet, we call for a one-off cash payment of £250 in 2022-23. This emergency support costs about £4.2bn, which is affordable given the fiscal room for manoeuvre that the OBR in March put at £20bn.”
A UC uplift of £25 per week between May and October 2022 would cost around £1.35bn and £2.7bn for a whole year.
The additional one-off cash payment aimed at the 11.3 million lower income households would cost £2.85bn.
Chancellor Rishi Sunak has hinted that additional government support to deal with the cost of living crisis could be on the way but the NIESR said he needs to act now.
“That slide into destitution is happening right now, these bills are happening right now. They’re not happening in October, or next winter, they are happening now. So, if we want to avoid destitution then the chancellor should act straight away,” Pabst told Yahoo Finance UK.
The outlook is not considering the more than likely energy price hike predicted in October, which could push even more households towards poverty.
Some campaigners and MPs have called for a one-off windfall tax on energy companies to help UK households with rising bills but the director of the NIESR warned the move could scare investors away.
"Windfall taxes are problematic. If we start using windfall taxes directly we create uncertainty about the corporate tax regime in the country," Jagjit S Chadha said.
"We do not have a tax regime that is encouraging an appropriate level of business — we are far away from it — and if we inject further volatility by introducing a windfall tax we are potentially reducing the scale of future investment when we need these companies to be investing [in the UK]," he added.
Energy bills are on track to surge to almost £3,000 by the end of the year, putting around 40% of UK households, potentially 10 million homes in fuel poverty this winter.
The think tank is forecasting inflation to average 7.8% in 2022 and to peak at 8.3% in the fourth quarter, remaining above 3% until 2024.
“Although the war in Ukraine is fundamentally a human tragedy, it has resulted in another supply shock for the UK economy: pushing down growth and pushing up on inflation,” Stephen Millard, NIESR’s deputy director for Macroeconomics, said.
The forecast for GDP growth is to increase by 3.5% in 2022 — declining in the third and fourth quarters — then by 0.8% in 2023 and 0.9% in 2024.
“We expect GDP to fall in the final two quarters of this year, but do not expect a severe recession. We also expect real incomes to continue to fall as inflation continues to rise.
"We need fiscal policy to loosen and monetary policy to tighten if the UK economy is going to sail safely through these treacherous seas,” he added.
The UK’s consumer prices rose by 7% in the 12 months to March — a 30-year high. The Bank of England's new central forecast for CPI inflation stands at 10.25% for the year's end.