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Never had it so squeezed

Matthew Whittaker

Date: 13. February 2013 / Category: Living Standards

This post orginally appeared on Public Finance

Even in the boom years, a large proportion of the population never shared the proceeds of growth. That’s even less likely today as austerity really hits home

Mired as we are in a fifth year of economic crisis and austerity, it’s easy to forget that not long ago we’d enjoyed fifteen sustained years of economic growth.

But it may not be just the severity of the downturn that explains why the good times feel so distant: for many of us, the growth years were not quite as rewarding as we once thought. Prior to the big squeeze, Britain was increasingly divided, and most of us were on the wrong side of the chasm.

The Resolution Foundation’s annual Squeezed Britain report, published today, highlights the extent to which this skewed growth favoured a minority at the very top of society, leaving those on low and modest incomes particularly exposed to the consequences of the subsequent downturn.

For every additional £1 of pre-tax and benefit income generated by working-age households between 1994-95 and 2007-08, those in the top 1 per cent alone accounted for 13p. In contrast, the economic growth of the 2000s produced little or no improvement in real-terms earnings for millions of households on low, middle and above-middle incomes.

Of course, incomes have been hit across the entire distribution range since 2008, with many of the super-rich experiencing some of the biggest cash losses. And the tax and benefit system has gone some way towards countering the growing inequality of income.

Nevertheless even if measured after tax, the bottom half of households took home just 28 per cent of all working-age household income in 2010-11, barely more than the 26 per cent accounted for by the richest tenth.

For many of the 10 million adults living in low to middle income households, the outcome of this decade of stagnation and downturn is a life lived close to the economic edge, with inadequate savings and little prospect of meeting many of the aspirations that once seemed to form an intrinsic part of the bargain between workers and society at large.

Two-thirds struggle to meet day-to-day bills, two-thirds have less than one-month’s income in savings and nearly half are unable to afford a holiday away from home each year. Faced with the prospect of having to save for 22 years to raise a typical first time buyer deposit, a majority of those aged under-35 now live in private rented accommodation.

With tax credit spending set to continue falling, improvements in the living standards of those on low to middle incomes will be increasingly dependent in the coming decade on employment outcomes – both getting more people in the household into work and raising their pay.

There may be some cause for optimism, with the jobs market having been surprisingly robust given the scale of decline in GDP. However, unemployment and under-employment remain serious problems and, crucially, typical wages are set to continue to be outstripped by the rising cost of living for at least another year or two.

Population trends and job losses in the public sector – with the Insttitute for Fiscal Studies suggesting that the figure could top 1 million by 2017-18 – mean that the private sector must continue to run up a down escalator to close the jobs gap.

Government can help by pursuing policies that support women and older workers into employment, with a focus on childcare and social care for example. And it is also worth considering what more can be done around the National Minimum Wage and the Living Wage.

What’s clear is that doing nothing is not really an option. Setting low to middle income households on the road to higher living standards will require not just economic growth, but a more equitable share of the gains of that growth than was seen prior to the recession.