At the same time, he expects wages to rise by around 5.3% – high in terms of cash, but still insufficient to keep pace with prices.
Combined with tax hikes, that equates to a 2.2% drop in real household disposable income, the biggest annual drop since records began in the 1950s.
Official forecasts indicate that the recovery in living standards will be slow and painful.
After taking into account the new taxes, the OBR expects the purchasing power of workers to be even lower in 2026-27 than it is today. Without Mr. Sunak’s tax hikes, real wages would recover by mid-decade.
“This fall comes despite our judgment that there will be more nominal wage response to high inflation than in periods of rising inflation over the past decade or so when there was greater slack labor market and lower churn,” the OBR said.
“However, we do not expect the latest energy price spike from Russia’s invasion of Ukraine to be accompanied by higher nominal wage growth.”
This comes on top of already extreme wage pressure.
Robert Joyce, deputy director of the IFS, said that “we are still struggling to significantly exceed 2008 earnings levels, even according to the latest estimates, by the mid-2020s”.
Wages rose steadily in the two decades before the financial crisis, but wages barely rose faster than prices in the years that followed, leaving a hole of around £11,000 in power. purchase compared to what would have been expected in 2007.
Mr Joyce said: ‘It’s starting to sound unreal, but that’s what happens if you have below-expectation growth for a very long time.’