Living standards weak growth means low-income families will fare worst

The Office for Budget Responsibility (OBR)’s forecast for average earnings projects that median household income will not grow at all for the next two years. The Institute for Fiscal Studies (IFS) has calculated the future effects of the economic downtown indicating that following on from the deep recession and already-tepid recovery, this would leave median household income in 2021–22 18% lower than might reasonably have been expected back in 2007–08, based on the long-run trend growth rate of almost 2% per year (see Figure below). That 18% difference is equivalent to more than £5,000 a year. This sustained slowdown in income growth is unprecedented in at least the last 60 years. Of course, some households will see a bigger squeeze on their income than others. Pensioner incomes will continue to grow faster than those of the rest of the population, while low-income households with children are likely to fare worst.

The conclusion that we are in the middle of a historically weak period of growth in living standards is not dependent on ‘gloomy’ forecasts being correct. Even if real earnings growth each year turns out 1 percentage point faster than the OBR expects – which would imply stronger growth than almost all forecasters expect – median income in 2021–22 would still be 16% lower than it would have been had the long-run trend growth rate continued beyond 2007–08. And even under such an optimistic scenario, median income would grow by less than 7% over the next five years – still slow growth by historical standards. Of course, things could instead turn out worse than the OBR expects.

These are among the findings of a new report by IFS researchers published today, Living Standards, Poverty and Inequality in the UK: 2016–17 to 2021–22, funded by the Joseph Rowntree Foundation. The research uses data on household incomes from the Family Resources Survey, together with OBR macroeconomic forecasts and announced changes in tax and benefit policy, to project household incomes up to 2021–22.

Beyond the averages, different groups are faring very differently:

• Median income among pensioners is projected to rise twice as quickly as that for the rest of the population, if earnings grow in line with the OBR’s forecast. By 2021–22, average pensioner income is likely to be 24% higher than it was in 2007–08. Once you account for their lower housing costs and smaller household size, median income is projected to be nearly 8% higher for pensioners than for non-pensioners by 2021–22, having been nearly 10% lower in 2007–08.

• Looking over the next five years, if planned benefit cuts go ahead and earnings grow as the OBR forecasts, inequality will start to rise. This is in contrast to the recent past: unexpectedly weak earnings growth and strong employment growth have combined to keep income inequality lower than before the financial crisis.

All this has implications for poverty. Measuring incomes after housing costs, which is currently more appropriate when focusing on poverty:

• If benefit cuts are implemented as planned then the poorest 15% of the population are likely to have lower incomes in five years’ time, on average. The four-year benefits freeze will cut the value of most working-age benefits by 6% given current inflation forecasts. Universal credit will be less generous than the benefits it is replacing, on average. And housing benefit is no longer designed to cover increases in rent for most recipients.

• Low-income households with children are set to fare worse than other households. Absolute child poverty on the official measure (see notes below for poverty lines) is projected to rise from 27.5% in 2014–15 to around 30% in 2021–22, returning to roughly its pre-recession level.This increase is entirely explained by the direct impact of tax and benefit reforms – particularly the cuts to working-age benefits – planned for this parliament. Meanwhile,absolute pensioner poverty is projected to fall from 13% in 2014–15 to 11% in 2021–22.

Tom Waters, an author of the report and a Research Economist at IFS, said: “If the OBR’s forecast for earnings growth is correct, average incomes will not increase at all over the next two years. Even if earnings do much better than expected over the next few years, the long shadow cast by the financial crisis will not have receded – average incomes in 2021–22 are still projected to be £5,000 a year lower than we might have reasonably expected back in 2007–08.”

Andrew Hood, an author of the report and a Senior Research Economist at IFS, said: “Weak earnings growth combined with planned benefit cuts means that the absolute poverty rate among children is projected to be roughly the same in 2021–22 as it was back in 2007–08. In the decade before that, it fell by a third. Tax and benefit changes planned for this parliament explain all of the projected increase in absolute child poverty between 2014–15 and 2021–22.”

Real median household income, 1961 to 2021–22

Note: Incomes measured before housing costs have been deducted and after adjusting for household size.