Household incomes are likely to stagnate or decline next year, according to new research from the Resolution Foundation, as Britain’s cost-of-living challenges continue.
While Chancellor Rachel Reeves has promised to improve public services, the leading thinktank says this “tax-rise gamble” risks leaving many people worse off in purely financial terms.
Researchers at the Resolution Foundation devised a measure of “real living standards”, combining disposable income with the benefits gained from public services. Its analysis revealed that the poorest 10 per cent of households could see their disposable income drop by 2 per cent, though improvements in services should leave them £28 better off overall. By contrast, higher earners may experience a 0.4 per cent real-terms reduction, equating to a cash hit of about £140 once the value of public services is taken into account.
Mike Brewer, the thinktank’s interim chief executive, explained: “The Budget tax-rise gamble is that, while people may not be better off in purely financial terms, they will feel better off if we can have better, less dysfunctional public services.”
However, significant challenges remain at both ends of the income scale. The poorest are grappling with higher council tax bills, rising housing costs and real-terms cuts to social security payments. Better-off households, meanwhile, typically rely less on state-provided services and see few gains from minimum wage increases.
The Institute for Fiscal Studies (IFS) warns that the chancellor’s strategy hinges on achieving stronger growth, but this is by no means guaranteed. Economic output contracted by 0.1 per cent in October, after a similar dip in September, marking the first consecutive monthly declines since the early months of the pandemic. The Bank of England now anticipates zero GDP growth from October to December, fuelling fears of recession.
Official forecasts from the Office for Budget Responsibility point to 2 per cent growth in 2025, yet independent economists put the figure at an average of just 1.3 per cent. Carl Emmerson, deputy director of the IFS, noted that the chancellor has left herself “not much wiggle room” if the economy underperforms. He added: “If she got unlucky, where would that leave the commitment to be delivering growth? Not very well. And what would she be doing on the public finances, given she seems reluctant to come back for more taxes?”
Next year’s spending review poses further difficulties, with government departments aiming to find 5 per cent cost savings while facing heavy demands from public services under strain. Emmerson warned: “The spending review will be a huge challenge. The Treasury has topped up this year’s and next year’s budgets, but from April 2026 onward the plans look tighter. Securing a spending review that sticks won’t be easy.”
Rachel Reeves has insisted that investment in areas such as healthcare, climate change and justice is essential not only for improving public services but also for supporting the long-term growth agenda. Critics, however, argue that money poured into day-to-day spending may do little to boost productivity or deliver the lasting economic gains needed to shore up the nation’s finances.
A Treasury spokesperson pointed to Ms Reeves’s commitment to “fix our economy and properly fund our public finances after 15 years of neglect”, emphasising that “our plan for change will deliver sustainable long-term growth, putting more money in people’s pockets through investment and relentless reform”.
Yet with the economy teetering on the brink of recession, households across the income spectrum face stagnating or shrinking disposable incomes and must rely on improved public services to feel any better off. As 2025 approaches, the test for the chancellor is whether her high-stakes bet on growth and public service investment will ultimately pay off.
