Average wage goes up by 3.4%, but cost of living shoots up by 9%

Two days before the budget, a new report by independent price comparison and switching service, uSwitch.com, reveals the average pay rise in the UK this year is only 3.4% against a 9% rise in bills. The average net monthly increase to UK salaries from 2007 to 2008 is £61 for the private sector, £31 for the public sector and £44 overall - against a £148 a month increase in essential living costs.

A shocking 9 million of us are not getting a pay rise this year, a further 13 million will receive a pay rise below the RPI (4.2%) and over 5 million people will get a pay rise falling short of the CPI (2.2%). The gap between the public and private sectors is growing, with pay rises so far this year showing a 66% pay gap between the two groups. In the meantime, soaring household costs have created a burden for the nation with essential bills rising by an average of £1,783 this year. Against the backdrop of inadequate pay rises, UK households will be left out of pocket to the tune of £21 billion.

Household Bills

While the average net salary increase in 2008 will be just £44 a month, above-inflation bill increases on items such as fuel, energy, food and mortgages are driving monthly household expenditure up by £148 every month. Drivers using unleaded petrol will be worst hit with costs increasing by £192 this year, a rise of 18% in just 12 months. Meanwhile the raft of price rises announced by energy companies has pushed the average dual fuel bill up 13%, adding a further £114 a year to energy bills.

Grocery prices are also a cause for concern. Increases in the cost of basic food items will result in shopping bills rising by a huge £324 a year, up 11% since 2007. Wheat prices saw their highest ever rise in a single day last week, causing the price of bread to increase by 28% since 2003. It could also have major repercussions on the cost of other everyday food purchases, such as ready meals, crisps, eggs, milk and meat. In addition, the drinks industry recently announced that the average cost of a pint of beer was set to hit £4. It blamed an ‘unprecedented’ rise in distribution and production costs along with an increase in the cost of barley and hops.

To make matters worse, according to Nationwide, mortgages are also on the increase. House prices have increased by 3% from £174,706 to £179,358 since the start of the year and the average two year fixed mortgage rate has increased from 5.23% to 5.85%. The result sees the average monthly mortgage repayment rising from £940 to £1,025, an increase of £85 (9%) a month or £1,020 a year. Council tax bills will also go up by 4.5% on average - a Band D property will cost an extra £59 a year.

Two of the few items creating a downward pressure are clothing and footwear, with prices falling faster in this year’s January sales compared to 2007.

Household bills may be rocketing, but pay rises are failing to keep up, leaving many concerned about what the budget will bring.

The gap between the public and private sectors continues to grow with the public sector, accounting for 5.6 million people in the UK, taking the biggest hit from the slowing pay increases. The average pay rise for the private sector is £1,089 per year (up 4.2%), while the public sector sees a rise of £558 (up 2.5%) – a 66% gap and a difference of £531 a year. Furthermore, 84% of public sector pay increases will fall below the RPI.

The 1.6 million teachers in the UK are facing a dim year ahead. Over a quarter (29%) are not getting a pay rise at all and those who do expect one are likely to see average increases of just 2.5% on the average salary of £25,630. Hardest hit however, are police, nurses and civil servants, who are likely to receive pay rises of 2.05%, 2.09% and 2.13% respectively. While 36% of nurses believe their salaries will stay static, a pay rise of 2.09% against the average salary of £19,578 will provide an increase of just £34 a month before tax and National Insurance.

Best off, and all receiving pay rises above both the RPI and the CPI, are CEOs (8.2%), financial advisors (7%), and lawyers (6%).

Britain’s 11 million pensioners are barely managing to keep up with rising costs. In 2008 they will only see a rise of 4% to their state pension - giving them £16 extra per month to contend with the escalating cost of living.

Ann Robinson, Director of Consumer Policy at uSwitch.com, says: “This is crunch time for UK households as we face up to a downturn in the economy, the news of below-inflation pay rises and the reality of having less money in our pockets. We are working harder, but are certainly not getting any wealthier. Hikes in taxes, the cost of food, utility bills and social contributions over the last decade have outpaced the overall rise in income levels, to push disposable incomes in the UK to their lowest level in a over a decade. Today’s news indicates that things could get a lot worse before they get better.

“This is a bleak time for consumers who are concerned about their jobs, their homes and their ongoing ability to manage their debts. Not only are the days of easy credit numbered, but we are also feeling the strain of food and petrol prices rising at their fastest rate since records began.

“The UK faces the double threat of turmoil in the financial markets and increasing inflation. When coupled with lower than anticipated salary increases it can only mean that consumers are in for a bumpy ride. People will be looking to the Chancellor to help ease the burden through his next budget.

“In the meantime, consumers can help themselves by taking a long hard look at their own household budgets to see where they can cut costs. There are positive signs that consumers are already cutting back, curtailing spending and trying to clear outstanding debt. With a careful eye and a steady hand on the household budget, most should be able to weather the storm.”

Alec Chrystal, Head of Finance Faculty at Cass Business School, says: “Rising costs paired with the impact of slow wage increases will certainly lead to less disposable income for many consumers and this will make them feel worse off. The likely squeeze on household incomes this year will have a significant impact on consumer confidence and could lead to a slowdown in consumer spending.”

Predictions for 2008 Budget:

Modest tax increases of approximately 2% for most domestic products

Rising taxes on alcohol and cigarettes will be justified on health grounds

Financial rules on tax rises and government spending cuts will be rebalanced to allow the Bank of
England to cut interest rates further

In general, the Chancellor needs to tighten his control on monetary policy without appearing to hit voters in the pocket. He may be more lenient, given that the main effects of this budget will be felt in the run up to the next election.