Budget relief not enough to prevent falling living standards

The budget offers some welcome relief, but incomes are still set to fall by £450 over the course of parliament, underlining the urgent need for more fundamental and long-term reform.

The worst parliament on record for living standards

The latest forecasts from the Office for Budget Responsibility (OBR) paint a bleak picture for living standards. Our modelling shows that average household disposable income after housing costs is projected to fall by £450 by 2029/30, after adjusting for inflation (Figure 1).

To put it into perspective, had incomes grown in line with the historical average between 1961 and the pandemic, households would have been around £5,000 better off by the end of the parliament. Instead, rising housing and energy costs, and weak real earnings growth, mean families will be worse off in 2029 than they were in 2024.

While the Budget offers some temporary relief, the underlying pressures on household finances remain. Weak growth in earnings means that many families are unlikely to see meaningful rises in their incomes, while higher housing and energy costs continue to eat into household budgets. Even where incomes increase before housing costs, families may still find themselves worse off once they have paid for essential expenses.

The Chancellor announced welcome measures in the Budget that would help families this winter. However, living standards are still set to fall by an average of 0.2% a year over the course of this parliament, making it the worst on record (Figure 2).

The analysis finds that the hit to living standards will be felt across the income distribution, although households on higher incomes are expected to see larger falls (Figure 3).

Amongst lower-income households, disposable incomes are dragged down by rising housing costs, which take up a greater share of income for this group. But this is partly offset by stronger earnings growth, likely driven in part by increases in the National Living Wage and higher employment rates. By contrast, households in the highest-income fifth are less affected by rising housing costs but are expected to see net earnings fall in real terms over the parliament, contributing to larger falls in income.

That being said, any hit in income is harder to bear for households already struggling to make ends meet. For these households, essentials such as housing, energy and food account for a much larger proportion of their outgoings, leaving little room to absorb further financial pressures. Even a relatively small fall in income can therefore mean having to cut back on essentials, making an already difficult situation worse.

Many low-income families are already struggling to afford the essential items, with little financial cushion to fall back on. For these families, the challenge is not simply avoiding further falls in income but achieving a level of economic security that allows them to meet their needs and do their best at work.

OBR forecasts also point to weak income growth

At first glance, the OBR's forecasts suggest a more positive outlook for living standards, with real household disposable income (RHDI) per person projected to grow by 2.1% over the course of the current parliament (Figure 4). However, these differences are largely accounted for by the difference in the population measured and the treatment of housing costs:

• Population: The headline RHDI statistic measures incomes per person, rather than per household. The OBR also produce a per 16+ series that is more comparable with households. On this basis, incomes are projected to fall by 0.5% over the parliament. The difference is driven by a lower number of children due to falling birth rate.
• Housing costs: The RHDI series adds a component of income called ‘imputed rents’. This is the estimated value of the rent a homeowner would have had to pay to live in their home if they hadn’t owned it. It is added to income to account for this saving; however, it is not actual income the household received. One consequence of this is that as housing costs increase, the ‘imputed rent’ increases, raising the measured ‘income’ for these households, even though the actual household is no better or worse off. By contrasting the JRF modelling deducts the actual housing costs that households face from their income. The importance of this is shown Figure 4 which shows incomes measured before and after housing costs are deducted.

Bold, long-term reform is needed to turn living standards around

But this bleak outlook is not inevitable. The Government can still take bold action to improve living standards by tackling the cost of essentials and strengthening families’ economic security.

Improving living standards is not just about easing the immediate pressure on household budgets. Greater economic security can also help people make decisions that improve their prospects, and take risks that drive productivity, whether that's investing in new skills, moving into better-paid work or starting a business. Giving families a more secure financial foundation can therefore support both household living standards and wider economic growth.

JRF has called for measures to bring down housing costs, including restoring annual increases to Local Housing Allowance alongside controls on rent rises (Belfield et al., 2026). An Affordable Energy Guarantee would help make essential energy use cheaper, and address the hit to incomes, with energy bills set to rise by around £500 in January. Meanwhile, a Protected Minimum Floor in Universal Credit would limit the deepest hardship caused by deductions and the benefit cap, and strengthen the safety net for families on the lowest incomes.

The full package of fully-funded reforms would ease the pressure on household budgets and lay the foundations for stronger living standards in the years ahead. This package would see incomes rise in real-terms by hundreds of pounds on average, across the lowest income 60% of households, with gains of £1,020 for the least well-off families by 2029/30.