When Alistair Darling delivered his first Pre-Budget Report in October last year the outlook for the economy was far from rosy. But the sharp deterioration in Britain’s household finances, as the Chancellor of the Exchequer prepares to step up to the dispatch box again, has come as a shock.

In the intervening months, the ill-effects of the credit crunch have seeped like a poison into the lives of millions of ordinary people. There have been few places to hide as banks and building societies have pushed up the cost of loans, from credit cards to car deals.

Rising mortgage costs mean that an increasing number of families are struggling with repayments. Hundreds of thousands of households have faced a payment shock as they have come to the end of cheap two-year deals taken out when mortgage rates were much lower.

Two years ago the average two-year fixed mortgage charged 5.44 per cent. Now the typical rate is 6.31 per cent, according to Moneyfacts, the financial comparison website, adding an extra £109 a month to repayments on a £150,000 loan.

Personal loan and credit card rates have also jumped at a time when the Bank of England’s base rate has fallen sharply from 5.75 per cent to 3 per cent. The average credit card rate has been pushed up from 16.6 per cent a year ago to 17.2 per cent today.

Rising energy bills have added to the pain. The average family now pays £1,290 a year on energy bills, according to Consumer Focus, compared with £912 at the start of this year.

For a country grown fat on credit – Britons owe £1.4 trillion in personal debt – the rise in household costs has been painful to bear. The Citizens Advice Bureaux said that an extra 1.7 million people had approached it with debt problems over the past year.

And it is going to get worse. The credit crunch, which began with reckless mortgage lending in the United States, looks certain to end in a deep and painful global recession that will hit Britain hard.

Official figures show that unemployment is at an 11-year high of 1.8 million, and that it is growing fast. One million more will be laid off by mid-2010, according to the Confederation of British Industry. That would leave nearly one in ten of the workforce out of work. And it is not just wealthy City bankers who are being asked to clear their desks. Job cuts are being felt across the economy, from building suppliers such as Wolseley to car manufacturers such as Rolls-Royce.

During the boom times, people were content to run down their savings and boost their borrowing because they were confident that they would still have a job the next day and the next week. This has left many families woefully unprepared for the trouble to come.

The UK’s savings ratio – the proportion of household income held in savings accounts and pensions – fell to -1.1 per cent this year, its lowest level since 1951. That means that Britons have been spending more of their savings than adding to them. This would be alarming at the best of times (since the Eighties, the ratio has averaged 8 per cent), but it is doubly so as unemployment rises.

Even those in work are feeling the pain, as the financial certainties that have been the lifeblood of the economy for the past decade have disappeared.

House prices are falling faster than they did in the early Nineties property crash, eating away at the value of what many had regarded as a rock-solid investment. Britons had become used to using their properties as cash machines to finance everything from school fees to expensive holidays. Now the ATM is closed for business, leaving many who overstretched themselves struggling to balance their budgets.

There have been some bright spots amid the gloom. After this month’s Bank of England base rate cut, mortgage rates have begun to fall, albeit slowly, for some borrowers. According to Moneyfacts, the average rate for a tracker mortgage pegged to the base rate has fallen from 6.29 per cent in October to 6.16 per cent.

However, for many households the benefits have been modest. First-time buyers in particular are still, in effect, locked out of the market as banks refuse to offer deals to anyone they regard as a risky prospect, including those with a small deposit.

Small businesses are also continuing to suffer from a lack of credit. About 1.6 million, or one in three, have been unable to obtain loans, according to the Federation of Small Businesses (FSB).

Help for small business owners is expected to form a linchpin of today’s report with plans to offer taxpayer guarantees for loans to small and medium-sized firms.

However, for many this will be too little and too late. One in three small businesses says that it is considering shutting up shop, according to the FSB. Four out of ten have said that they will have to lay off staff in the next 12 months.

The Pre-Budget Report gives the Chancellor a chance to ease the pain as the recession bites. If Mr Darling gets things right, fewer businesses will go bust and fewer families will lose their jobs and homes.

However, that will mean little to the thousands who find themselves unwilling victims of the economic slump. Bold tax cuts may make it feel as though Christmas has come early for some, but as unemployment rises and household budgets remain dangerously stretched, any positive feeling is unlikely to last.

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