Rachel Reeves used her spring statement to insist her economic policies are working and things are looking up for household finances after the cost of living crisis.<\/p>\n
The chancellor said that by the next general election \u201cpeople will be over \u00a31,000 a year better off\u201d. But against the backdrop of war in the Middle East, financial experts warned that the new economic forecasts published alongside her statement might have already been overtaken by events<\/a>.<\/p>\n We look at what it could all mean for you.<\/p>\n \u2018Over \u00a31,000 a year better off by the next election\u2019<\/p>\n This sexy headline is derived from an unsexy bit of maths \u2013 a comparison of the average disposable income in the final year of the Tory government (\u00a325,600) with the projection for the final year of the current parliament (\u00a326,685). The difference is \u00a31,085.<\/p>\n Officially called \u201creal household disposable income\u201d, this is the money people have left to spend \u2013 adjusted for inflation \u2013 after they have paid their taxes.<\/p>\n The government\u2019s forecaster, the Office for Budget Responsibility (OBR), predicts that disposable income based on this measure will grow by 0.6%-0.9% each year between 2026 and 2030. This is relatively muted progress compared with recent decades.<\/p>\n One reason for the sluggish progress is the decision to freeze income tax thresholds <\/a>until the 2030-31 tax year. This results in what is called \u201cfiscal drag\u201d<\/a>: a phenomenon where people are dragged into higher tax bands when they get pay rises.<\/p>\n The OBR also forecast that inflation would be at or near the target level of 2% across the next five years. After soaring above 11%<\/a> at the height of the cost of living crisis, the drift downwards in the pace of price rises had fuelled expectations of further interest rate cuts.<\/p>\n However, the outbreak of the Iran crisis this week has sent energy prices soaring<\/a>, raising fears of another cost of living spike.<\/p>\n What about my mortgage?<\/p>\n Reeves said recent interest rate cuts meant someone taking out a two-year fixed mortgage now would typically save more than \u00a31,300 a year on their repayments.<\/p>\n The stat compares interest rates on a two-year fixed mortgage in June 2024 (4.97%) and January 2026 (4.07%), based on a \u00a3215,000 loan with a term length of 29 years.<\/p>\n Obviously the independent Bank of England sets rates, not the government, but after a difficult few years hopes had been high that borrowing costs would fall further this year.<\/p>\n The central bank has cut interest rates six times since the general election in July 2024, bringing the base rate down to 3.75%<\/a>. Last week markets were putting an 80% probability on another cut when the rate setting committee meets on 19 March.<\/p>\n But with the chaos unleashed by war in the Middle East, the path interest rates will follow is less certain and odds of a cut in March have slumped to about 30%.<\/p>\n In recent weeks, mortgage rates have held steady and deals are certainly better than they were. The current average on a two-year fix is 4.83% and 4.95% on a five-year deal. A year ago, those figures were both over 5% at 5.39% and 5.22% respectively.<\/p>\n The OBR said it expected the average interest rate on mortgages to rise from 4.1% this year to an average of 4.5% over the 2027 to 2030 period. This is 0.3 percentage points lower than its November forecast but, remember, these numbers were crunched before the war broke out.<\/p>\n The forecaster also predicted house prices would rise by between 2.4% and 2.9% each year between now and 2030.<\/p>\n And energy bills?<\/p>\n