Middle-class families set for an extra £500 hit to annual bills next year

Families should brace for a £500 annual rise in bills next year despite the Prime Minister's pledge to offer relief from a new wave of cost-of-living pressures, new analysis shows.

With just a few days until John Healey's first Budget as Chancellor, the Adam Smith Institute (ASI) says the average household will pay an additional £206.50 on gas and electricity in 2027, and another £36 on water.

Healey is expected to use his Budget to announce cost-of-living help for lower income families, including to ease higher energy bills which have been driven higher by the Middle East conflict.

Burnham has also asked whether it is 'feasible' to axe standing charges on gas bills.

But the ASI warns that it will not be enough to stem a surge in bills, which will also see supermarket bills rise by £112.19 over the year and fuel an extra £140.64, bringing the total to £495.33.

'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,' said Silvia Andreoletti, head of communications at the ASI.

'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.'

Forecasts show that the 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.

For now, the inflation spike has been largely contained within energy, but there are fears that it could soon lead to second-round effects, which would see the headline rate peak even higher than first thought and risk keeping interest rates higher for longer.

The Bank of England is expected to raise interest rates at its meeting next month, with as many as three more hikes over the next year, piling further pressure on mortgages.

The average two-year fixed rate rose from 5.59 to 5.93 per cent between the start of September and October, while the average five-year fixed rate rose from 5.63 to 5.95 per cent over the same period, according to Moneyfacts data.

The ASI's analysis found that the monthly remortgage payments for the average family whose fixed two-year term expires in October 2027 will be £137 higher.

'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,' Andreoletti told The Telegraph.

In his speech at Labour's conference last month, Healey pledged to use his Budget to give households 'breathing space' but also warned that the government had limited resources.

Against the worsening global backdrop, Healey's buffer against economic shocks is £12billion – half that left by his predecessor Rachel Reeves – meaning he has little 'headroom' to meet his fiscal rules.

He is expected to deliver a 'do no harm' package of limited tax hikes for banks, and cost-of-living support for families and firms and delay any big spending decisions on defence, benefits and social care.

But he is under pressure to act on the bloated welfare bill after last month's debt pile topped £3trillion, with the monthly debt interest bill of £10.9billion its highest ever. 

And higher borrowing is expected to add £70billion more to public sector net debt than previously forecast, The Mail on Sunday revealed.

The IFS said: 'If the Government does not deliver the fall in borrowing in its current plans, the picture will remain concerning.'