Chancellor John Healey faces a politically non-survivable outlook for household incomes, little time to respond, and a macroeconomic trap where a wrong move could worsen the situation, according to Alfie Stirling, an economist and director of policy at the Joseph Rowntree Foundation (JRF).
The scale of the challenge
Before Rachel Reeves took office, the average family was set to be worse off in 2029 than in 2019. Normally, household incomes rise by about £5,000 (2026 prices) every five years. Never before on modern record have they fallen across an entire decade. The last chancellor ultimately failed to move the dial enough, meaning Healey inherits essentially the same outlook for living standards as Reeves, but with barely half as much time to act before defending his record at the ballot box.
A more complicated economic situation
Household and business spending is drying up, crying out for interest rate cuts or government support. However, inflation and borrowing costs are already elevated, and fresh price pressures from the conflict in Iran are penetrating supply chains. The Bank of England is more likely to raise interest rates further than cut them. Any clumsy government intervention risks even higher borrowing costs for itself, families, and firms.
The triple bind
Stirling describes a triple bind: a politically non-survivable outlook for household incomes, little time to respond, and a natural macroeconomic trap where a wrong move could only make things worse. The key problem is how to support families now without provoking higher interest rates. The answer: lower inflation directly by pushing down on essential prices, especially for low- and middle-income families, and pay for it with slightly higher tax contributions or foregone profit from investment income such as capital gains, dividends, and rents.
Energy and rent interventions
The JRF recommends an affordable energy guarantee that reforms the Ofgem pricing system to provide a basic portion of cheaper energy for everyone, with larger portions for those with lower incomes or greater energy needs. This could replace the less well-targeted VAT cut on electricity and be funded by closing the gap in tax treatment between capital gains and earnings from work. Currently, a quarter of people with incomes above £10m a year pay a lower effective tax rate than the average employee.
On renting, the government should intervene to slow rent growth nationally, allowing mayors to opt out or go further for local housing markets. This should be accompanied by a rebalancing of landlord taxation: allowing mortgaged landlords to fully tax-deduct their interest costs, paid for by charging national insurance on remaining income. Because mortgaged landlords typically have lower profits than those who own outright, this combination could reduce the number of landlords in financial distress, maintaining house prices and supply.
Modelling the impact
New modelling shows that a package built around these proposals could return real incomes to growth for a majority of households, more than making up for the fall in incomes from the last parliament and the anticipated effects from conflict in the Middle East. These measures could also reduce inflation by half a percentage point, easing pressure for higher interest rates. Improving household economic security in this way also drives longer-term economic growth, as financially secure people are more productive and more likely to risk moving to a better job.
Remaining challenges
Healey will need to sort the wheat from the chaff from competing demands and manage noise from those losing out from tax reform. Prime Minister Andy Burnham is right to make breathing space from the cost of living his early priority. The question is whether, and by when, Healey can deliver it. Voters were promised a change chancellor once already; both they and the new prime minister really need one now.
