Middle-class families face a £495.33 surge in annual household bills in 2027 according to new analysis from the Adam Smith Institute ahead of the Budget. The warning comes despite the Prime Minister's pledge to offer relief from a new wave of cost-of-living pressures.
With just a few days until Chancellor John Healey delivers his first Budget, the Adam Smith Institute (ASI) calculated that the average household will pay an additional £206.50 on gas and electricity in 2027. Families will also pay another £36 on their annual water bills.
Rising costs will push supermarket grocery bills up by £112.19 over the year, according to the think tank's findings. Motorists face an extra £140.64 for fuel assuming fuel duty rises go ahead, bringing the combined annual increase for the average household to £495.33.
Household bills and Budget relief proposals
Healey is expected to use his Budget statement to announce cost-of-living support for lower-income families. Those measures are expected to include help to ease higher energy bills, which have been driven up by the conflict in the Middle East.
Both John Healey and Andy Burnham have pledged to offer cost-of-living help to households. Burnham has also asked whether it is "feasible" to axe standing charges on gas bills.
Standing charges are fixed daily fees charged by energy suppliers regardless of how much energy a home uses, covering the cost of maintaining pipes and meters across the supply network. Fuel duty is a flat tax levied by the UK government on purchases of petrol and diesel, while the Budget is the formal financial statement in which the Chancellor sets out tax and spending plans to Parliament.
However, the Adam Smith Institute, a London-based free-market think tank founded in 1977 that researches tax and public policy, warned that the Budget measures will not be enough to stem a wider surge in bills. Silvia Andreoletti, head of communications at the ASI, said: "No matter what's in the Budget, it's unlikely the Government will be able to save the middle-classes from a cost-of-living squeeze in the coming year."
Andreoletti added: "High energy costs are driving up household bills and food prices, while inflation is making everything from rent to groceries more expensive. Oil markets point to cheaper petrol next year but its effect will be dampened by the upcoming fuel duty hikes."
Energy price cap and inflation forecasts
Forecasts show that the domestic energy price cap, which rose by 4 per cent in October, is expected to rise by a further 21 per cent to £2,084 in the new year. Overseen by the energy regulator Ofgem since 2019, the price cap sets the maximum rate suppliers can charge per unit of gas and electricity for households on standard variable tariffs.
For now, the recent inflation spike has remained largely contained within the energy sector. However, there are fears that it could soon lead to second-round effects across the wider economy, which would see the headline inflation rate peak even higher than first thought.
Second-round effects happen when higher energy costs feed into wider business expenses and prices across goods and services. A higher peak in headline inflation carries the risk of keeping interest rates higher for longer.
Bank of England interest rates and mortgage costs
The Bank of England is expected to raise interest rates at its monetary policy meeting next month. As many as three further rate hikes are expected over the next year, piling additional pressure on homeowners with mortgages.
As the United Kingdom's central bank, the Bank of England sets the benchmark interest rate to control inflation, directly influencing the cost of residential home loans. Financial data company Moneyfacts, which tracks UK retail savings and mortgage products, reported that fixed mortgage rates already climbed between September and October.
According to Moneyfacts data, the average two-year fixed mortgage rate rose from 5.59 per cent to 5.93 per cent between the start of September and October. Over the same period, the average five-year fixed rate rose from 5.63 per cent to 5.95 per cent.
The ASI's analysis found that the average family whose fixed two-year mortgage term expires in October 2027 will face monthly remortgage payments that are £137 higher. Speaking to The Telegraph, Andreoletti said: "The Government needs to cut its spending and reduce costs for the average household rather than throw more money at short-term fixes that add to borrowing and keep inflation higher for longer."
Chancellor John Healey's fiscal headroom and UK national debt
In his speech at the Labour Party conference last month, Healey pledged to use his Budget to give households "breathing space", but also warned that the government had limited resources. Against a worsening global backdrop, Healey's buffer against economic shocks stands at £12 billion, half the amount left by his predecessor Rachel Reeves.
That reduced buffer means the Chancellor has little "headroom" to meet his fiscal rules. In UK economic policy, fiscal headroom is the margin by which forecasts show the Treasury can meet its self-imposed borrowing targets without raising taxes or cutting public spending.
Healey is under pressure to act on the welfare bill after last month's national debt pile topped £3 trillion, with the monthly debt interest bill reaching £10.9 billion, its highest level ever. Higher borrowing is also expected to add £70 billion more to public sector net debt than previously forecast, The Mail on Sunday revealed.
The Institute for Fiscal Studies (IFS), an independent London-based economic research institute, warned over the state of the public finances. The IFS said: "If the Government does not deliver the fall in borrowing in its current plans, the picture will remain concerning."
When Healey delivers his Budget in a few days, he is expected to set out a "do no harm" package of limited tax hikes for banks and cost-of-living support for families and firms, while delaying any big spending decisions on defence, benefits, and social care.
