Real incomes ‘will not return to pre-Covid levels until 2026 for many families’

The National Institute of Economic and Social Research said interest rates are likely to have peaked at 5.25%.

The NIESR predicted that interest rates would not go higher than today’s 5.25% base rate (Alamy/PA)

The real incomes of the poorest half of UK families will not get back to their pre-pandemic levels until the end of 2026, new analysis has suggested.

The National Institute of Economic and Social Research (NIESR) said it thinks interest rates have peaked and that wages will rise by just over 7% in 2023 and 2024.

It called on the Government to increase public investment rather than implementing tax cuts ahead of the autumn statement later this month.

“In its absence the UK is set for a decade in the doldrums and poor prospects for regional regeneration,” it said.

Only a rethink of economic and social policy can avoid another period of protracted stagnation where the United Kingdom falls further behind other advanced economies and regional disparities continue to widen

Professor Adrian Pabst, NIESR

The NIESR said the real incomes of families in the bottom half of the income distribution will be around 5% lower in the 2024 financial year compared with the year ending March 2020.

It will mean families will not see their real incomes, which take into account inflation, hit pre-pandemic levels until 2026, despite big wage rises.

“Higher real wages this year are a welcome boost, especially for low-income working families who have been hit hardest by the Covid and inflation shocks,” said Professor Adrian Pabst, of the NIESR.

“But a return to pre-pandemic living standards will require sustained real wage growth, including further increases in the National Living Wage.”

The group said the Government should increase investment incentives for companies.

This could include making permanent a recent decision which allows companies to fully expense their investment.

The NIESR predicted that interest rates would not go higher than today’s 5.25% base rate, and will settle at between 3-3.5%.

It said these higher rates, coupled with falling real wages, has helped to push down house prices for the first time in nearly 15 years.

It forecast that prices will fall by around 6.5% by the second quarter of 2025, putting around 50,000 more households into negative equity.

Prof Pabst added: “Only a rethink of economic and social policy can avoid another period of protracted stagnation where the United Kingdom falls further behind other advanced economies and regional disparities continue to widen.”