The Institute For Fiscal Studies (IFS) has released a new briefing note as part of its pre-election analysis, provides key information on incomes and inequality. It analyses net household incomes (after taxes and benefits) since the recession, and looks ahead to what we might expect over the next parliament if official economic forecasts turn out to be right and the new government sticks to current tax and benefit plans. The key findings are:
- Real average (median) income is only around 5% higher now than it was in 2007–08. This is more than 10% lower than might have been expected before the recession, based upon the historical growth rate.
- This masks substantial differences across age groups: average income among 22 to 30 year-olds is only now recovering its 2007–08 level, having been hit hard by the recession. By contrast, pensioners have seen sustained increases in their incomes, with their average income growing by nearly 15% over the same period.
- The weakness in income growth has been seen across the income distribution. Growth in incomes has been slightly slower for high-income households (reducing income inequality), though they benefited most from falls in mortgage interest payments. But the slow growth in income among lower-income households has led to overall and child absolute poverty rates (on the official government definition) falling by just 2 and 3 percentage points respectively – in contrast to 15 and 13 percentage point falls over the previous decade.
- Projections suggest that, if the Office for Budget Responsibility (OBR) are correct about the outlook for employment, earnings and inflation, there will be no real growth in median income over the next two years, and only modest growth thereafter. This would leave incomes in 2021-22 more than 15% below where we might have expected before the financial crisis hit, based on historical growth rates – equivalent to over £5,000 per household per year on average.
- Projected increases in inequality: both because forecast growth in average real earnings would benefit higher income households more than lower income ones, and because cuts in the real value of benefits will reduce incomes among poorer working age households. Real incomes are projected to fall among the poorest 20% of households over the next five years, with households with children being particularly affected.
Tom Waters, a Research Economist at IFS, said “The defining feature of the past decade has been slow growth in incomes, not rising inequality in incomes. While average incomes have begun to recover over the past few years, official forecasts imply no income growth at all over the next two years, thanks to higher inflation and weak growth in earnings, and weak income growth beyond that. That would leave incomes at the end of this coming parliament more than 15% below where we might have expected before the financial crisis hit – equivalent to over £5,000 per household per year on average”.
The full report can be found here.
