Household incomes are likely to stagnate or fall next year as the UK’s cost of living problems continue, according to new research from the Resolution Foundation.
While Chancellor Rachel Reeves has promised to improve public services, the leading think tank says this “tax increase gamble” risks leaving many people worse off purely financially.
Researchers at the Resolution Foundation have devised a measure of ‘real living standards’, combining disposable income with the benefits of public services. The analysis found that the poorest 10 per cent of households could see their disposable income fall by 2 per cent, although improvements in services should leave them £28 better off in total. In contrast, those on higher incomes could experience a real reduction of 0.4 per cent, which equates to a cash hit of around £140 once the value of public services is taken into account.
Mike Brewer, the think tank’s interim chief executive, explained: “The gamble on tax increases is that while people won’t be better off in purely financial terms, they will feel better off if we have better, less dysfunctional can have public services.”
However, significant challenges remain at both ends of the income scale. The poorest are struggling with higher council taxes, rising housing costs and real cuts to social security benefits. Better-off households, meanwhile, tend to be less dependent on state-provided services and see little gain from minimum wage increases.
The Institute for Fiscal Studies (IFS) warns that the Chancellor’s strategy depends on delivering stronger growth, but this is by no means guaranteed. Economic output contracted 0.1 percent in October, following a similar dip in September, marking the first consecutive monthly declines since the early months of the pandemic. The Bank of England now expects zero GDP growth from October to December, fueling fears of a recession.
Official forecasts from the Office for Budget Responsibility indicate growth of 2 percent in 2025, but independent economists estimate the figure to average just 1.3 percent. Carl Emmerson, deputy director of the IFS, noted that the chancellor has not left himself “much leeway” if the economy is underperforming. He added: “If she were to be unlucky, where would be the commitment to delivering growth? Not very good. And what would she do about the government’s finances, since she seems reluctant to come back for more taxes?
Next year’s spending review poses further challenges, with government departments aiming for a 5 per cent cost saving while facing heavy demands from under-pressure public services. Emmerson warned: “The spending review will be a huge challenge. The Ministry of Finance has increased the budgets for this year and next year, but from April 2026 the plans look tighter. It will not be easy to achieve a spending overview that sticks.”
Rachel Reeves has highlighted that investments in areas such as health, climate change and justice are not only essential for improving public services, but also for supporting the long-term growth agenda. However, critics argue that the money poured into day-to-day spending may do little to increase productivity or deliver the lasting economic gains needed to shore up the country’s finances.
A Treasury spokesperson pointed to Ms. Reeves’ pledge to “fix our economy and properly finance our public finances after 15 years of neglect,” and emphasized that “our plan for change delivers long-term, sustainable growth long term, by putting more money in people’s pockets through investment and ruthless reforms.”
But with the economy teetering on the brink of recession, households across the income spectrum are facing stagnant or shrinking disposable incomes and must rely on improved public services to feel better off. As 2025 approaches, the test for the Chancellor will be whether her commitment to growth and investment in public services will ultimately pay off.