Growing apart? Recovery is coming, but unevenly so

By Matt Whittaker, CEO of PBE

The cost of living crisis is starting, slowly, to ease… 

UK living standards are far from buoyant. After all, it’s less than three weeks since we had confirmation that the economy had officially entered a recession at the end of 2023. We remain poorer today than we were on the eve of the pandemic, and the average 2.5% a year growth in income per person that prevailed for five decades ahead of the 2008 financial crisis has shrunk to just 0.6% in the 15 years since then. 

But everything is relative. Compared to where we were 12 months ago, things are looking up. CPI inflation has fallen from 10.1% last March (and from a peak of 11.1% in 2022) to ‘just’ 4% at the last count. Higher than we’d become accustomed to over the 30 years preceding the pandemic, but no longer quite so out of the ordinary. With average wage growth having outpaced price rises since last summer, the cost of living crisis is squeezing less hard than it was. 

Among those who pay for their accommodation, 43% said they were finding it difficult to afford in the middle of 2023. Today, the figure is 37%. That’s still significantly higher than the 26% recorded when the series was first collected in early 2022, and it’s true that more than a million mortgagor households will find themselves jumping to higher repayments in the coming year as their fixed rate deals expire. But the situation no longer feels like it has the potential to spiral out of control. Likewise, the proportion of those who pay for gas and electricity reporting difficulties with the cost has fallen from 48% a year ago to 42% today. With the energy price cap forecast to fall over the course of 2024, we can expect the picture to continue to improve on this front too.  

2024 may not be a year of rapid economic rebound: more a first gear crawl. The country is at least no longer stuck in reverse... 

... but the challenge is intensifying for some 

Except that a significant minority are. In practice, a modest recovery in economic averages this year will mask a skewed picture across the distribution. Unemployment is projected to rise, dedicated cost of living benefit payments are being withdrawn, and combined National Insurance and income tax changes that will serve as an economic tailwind for those with above-median wages will form a further headwind for earners in the bottom half. After accounting for changes in housing costs, the Resolution Foundation projects that the income squeeze will remain in place for the poorest 35% (and the richest 5%) of working-age households in the coming year. 

The breadth of the cost of living crisis may then be in decline as more of us start to see an upturn in our personal finances, but the challenge continues to deepen for many.  

Consider for example that the proportion of gas and electricity direct debits that failed due to insufficient funds increased fivefold between March 2019 and January 2024 (from 0.29% to 1.29%). Fewer people may be reporting affordability issues overall, but a small but rapidly growing number are showing signs of extreme distress.  

The ONS has identified a total of 1.4 million adults across Great Britain who are suffering from both fuel and food insecurity. Within this group, 69% say they’re eating smaller portions of food than in the past as a means of saving money and 64% say they’re eating fewer portions of fruit and vegetables.  

And it’s not just personal finance issues at play of course. The number of households living in temporary accommodation in England reached a new peak of 109,000 in 2023, up from 88,000 immediately ahead of the pandemic and more than double the 48,000 total recorded at the end of 2010. Meanwhile the proportion of adults across Great Britain reporting their health to be good or very good stands at just 67% today, down from 76% immediately ahead of the pandemic. Over the same period, the proportion recording low levels of satisfaction with their life has increased from 9.3% to 10.7%. The implication is that somewhere in the region of 5.3 million adults in Britain are not OK with their lives. 

Public service pressures mean crucial support may be in decline… 

Their situations won’t be helped by the fact that, even as the economy starts to turn the corner, the pressures being felt by many public services are growing. According to the IFS, the Autumn Statement pencilled in cuts of 1.8% between 2024-25 and 2028-29 in day-to-day spending on services outside of the protected areas of the NHS, schools, defence and overseas aid. Should the Chancellor choose to offer further tax cuts at this week’s Budget without identifying offsetting revenue raisers, then the implied Austerity 2.0 would grow deeper still.  

Further spending cuts of this magnitude are, in truth, unlikely to be deliverable by whoever forms the next government. But whatever the future may hold, it’s clear that some services are already at breaking point – especially across local government. Surveyed after the Autumn Statement by the LGA, nearly one-in-five council leaders and chief executives thought it fairly or very likely that their authorities would issue Section 114 (‘bankruptcy’) notices in 2023-24 or 2024-25. Half were unconfident about being able to fulfil their statutory duties in the coming fiscal year. 

... placing still greater demand on the UK’s already-stretched charities  

Against this backdrop of deepening challenge and shrinking public service provision, the thousands of charities across the country that engage with the nation’s most vulnerable will need to continue stepping up, even as the broader narrative begins to move on.  

Going again is tough to do when activity is already elevated though. Citizens Advice referred an average of 28,470 people to foodbanks or other charitable support across England and Wales in the three months to January 2024, 8% more than the same period 12 months earlier and a remarkable 64% up on the three months to March 2021. Given this context, it’s encouraging to see some recent upturn in the charity sector outlook.  

Results from the latest VCSE Sector Barometer undertaken by PBE and NTU National VCSE Data and Insights Observatory show that 72% of smaller charities (annual incomes below £100,000) believe they will be able to meet the demand they face over the next three months – a marked improvement on the 58% figure recorded in the first wave of the Barometer back in November 2022. Likewise, a net balance of +7% of large charities (incomes of £1 million+) reported an improvement in their financial position in the three months ahead of the February 2024 wave of the survey – as opposed to a net balance of -24% in the November 2022 iteration. 

Again though, everything is relative. Recent quarter-on-quarter improvements follow sustained periods of reversal, and many of the levels recorded in the latest Barometer survey remain concerning. Overall, one-in-three (32%) charities continue to report a deterioration in their financial positions over the last three months. Similarly, 41% say they’re struggling to recruit, with one-in-three (34%) of these charities unable to meet demand for their help as a result. And 38% of those responding last month said they’re making unplanned use of their reserves – calling the sustainability of current activity levels into question. 

The local government funding pressure is proving to be a particular worry. Among the 60% of responding charities that say they work with local authorities, more than half (53%) describe their council’s financial position as a moderate or high risk to them. Funding is an obvious concern, with 28% of organisations expecting a reduction in council funding over the coming year. But charities are worried too about their capacity to deal with the increase in demand that the withdrawal of council services will prompt. And, among the 22% of charities that rent or operate out of local authority property, there is some concern about the potential for eviction or for reduced maintenance if councils look to sell assets or cut costs. 

The sector then remains under considerable pressure, having to balance the need to support those at the sharp end of a narrowing but apparently intensifying cost of living crisis with its own vulnerability to the ripple effects of public service spending cuts. It will need help along the way, but there is little to indicate that this will be forthcoming at Wednesday’s Budget. 

A slowly narrowing but rapidly deepening crisis requires a policy response that targets recovery for all  

If the Chancellor delivers on his ambitions for cutting one or both of Income Tax or National Insurance, then he may well amplify the relief being felt by an increasing number of households at the easing of the cost of living crisis. In the near-term at least. But the changes that are being floated will do little for those who are likely to be in greatest need in the coming years and, to the extent that they are paid for by further implied cuts in public services, they may do active damage. 

The country has been stuck in reverse for several years, so recent improvements in the outlook for living standards – however modest – are very welcome. But it’s vital that we transition from a crisis in which we really have all been in it together to a recovery that leaves no one behind.