Household incomes are likely to stagnate or fall next year, according to new research by the Decision Foundation, as the cost of living challenges in Britain continue.
While Chancellor Rachel Reeves has promised to improve public services, the leading think tank says this “tax rise gamble” risks leaving many people worse off in purely financial terms.
Researchers at the Decision Foundation have created a measure of “real living standards,” combining disposable income and benefits gained from public services. Its analysis revealed that the poorest 10 per cent of households could see their disposable income fall by 2 per cent, although improvements in services would leave them £28 better off overall. By contrast, higher earners could face a fall of 0.4 per cent in real terms, which equates to a cash loss of around £140 once the value of public services is taken into account.
Mike Brewer, interim chief executive of the think tank, explained: “The budget gamble of raising taxes is that although people may not be better off in purely financial terms, they will feel better off if we can get better, less dysfunctional public services.” “.
However, significant challenges remain at both ends of the income scale. The poor suffer from rising council tax bills, rising housing costs and real cuts in social security payments. On the other hand, better-off families typically rely less on state services and see little gain from increases in the minimum wage.
The Institute for Fiscal Studies (IFS) warns that the Chancellor’s strategy hinges on stronger growth, but this is by no means guaranteed. Economic output contracted by 0.1 percent in October, after a similar decline in September, marking the first consecutive monthly decline since the first months of the pandemic. The Bank of England now expects GDP to grow to zero in the October-December period, raising fears of a recession.
Official forecasts from the Office for Budget Responsibility suggest growth of 2 per cent in 2025, but independent economists estimate the figure at an average of just 1.3 per cent. Carl Emerson, deputy director of the Financial Services Corporation, noted that the Chancellor did not leave herself “much wiggle room” if the economy performed poorly. He added: “If they are unlucky, where does that leave the commitment to growth? Not very good. And what will it do in terms of public finances, given that they seem reluctant to come back for more taxes?”
Next year’s spending review poses further difficulties, with government departments aiming for 5 per cent cost savings while facing heavy demands from public services under pressure. “The spending review will be a huge challenge,” Emerson warned. “The Treasury has increased budgets this year and next, but from April 2026 onwards, plans look tougher. Securing the spending review will not be easy.”
Rachel Reeves has insisted that investment in areas such as healthcare, climate change and justice is essential not only to improve public services but also to support the long-term growth agenda. However, critics argue that the money flowing into everyday spending may do little to boost productivity or achieve the lasting economic gains needed to shore up the country’s finances.
A Treasury spokesperson noted Ms Reeves’ commitment to “fixing our economy and getting our public finances right after 15 years of neglect”, stressing that “our plan for change will deliver sustainable growth over the long term, putting more money in people’s pockets through investment and support.” “. “Relentless reform.”
However, as the economy teeters on the brink of recession, households across the income spectrum face stagnant or shrinking disposable income, and must rely on improved public services to feel better. As 2025 approaches, the test for the Chancellor is whether her big bet on growth and investment in the public service will ultimately pay off.