For low income families, the next four years could be worse than the recession

Published on Incomes and Inequality

Will households be better off in 2020 than in 2016? And who will fare best?

Economic predictions are always uncertain, particularly as we embark on the long process of negotiating just what Brexit really means. But the official Office for Budget Responsibility forecasts for pay, prices and employment are as comprehensive as it gets, and they’re what Chancellors set their Budgets by.

By adding in the impact of planned government policies on things like tax cuts, benefit changes and the National Living Wage, we can project what might happen not just to overall economic growth, but to household incomes too.

Let’s start at the top. By 2021, we’re predicting that the richest third of working-age households are set to have average incomes that are around 4 per cent (or roughly £2,100 per household) higher than today after accounting for inflation. That’s an improvement, but it’s pretty modest stuff compared to the pace of growth we’d normally expect over four years. For that, we can thank the prospects for tepid pay growth.

Even 4 per cent would be welcome though for those in the middle third of the pack. Here household incomes are likely to be broadly unchanged by 2021. Coming so soon after the last crash and following only a brief recovery, such an outcome would be disappointing to say the least.

Most concerning though is the prospect facing the poorest third of working-age households (covering around 18 million adults and children). Here, average incomes look set to fall by 10 per cent (around £1,200 per household) over the coming four years. This group is affected by the same weak pay growth impacting on those with higher incomes, but its members will also be the most affected by the range of welfare cuts introduced by the then Chancellor George Osborne. These include a freeze on the value of benefits until April 2020, which will bite even harder than previously thought thanks to the unexpectedly fast pace at which prices are rising.

Notes: Thirds refer to the adult and child population living in non-pensioner households. Incomes are inflation-adjusted using a projection of CPI excluding housing costs.
Source: Resolution Foundation projection using OBR economic forecasts, planned tax and benefit policies and other assumptions. See Living Standards 2017 for more details.

In short, the forecast is one of weak growth and rapidly rising inequality.

How does this outlook compare to the last great living standards squeeze that followed the financial crisis? That ‘Great Recession’ certainly packed a punch – one we are still recovering from. But the impact was felt differently. Middle and higher income households were hit the hardest as pay packets shrank, while our social security safety net cushioned the squeeze for poorer households.

So while the upcoming living standards slowdown will not be nearly as bad as the last one for most households, for the poorest third of households it could be even worse than the Great Recession.

The official economic forecasts that underpin this troubling outlook will inevitably be wrong – for better or for worse. But there is more certainty about tax and benefit policy – and it is these that play a greater role in determining the distribution of growth. The good news is that government is not powerless to tackle this grim outlook. As well as trying to ensure overall prosperity, whoever takes power on 8 June will need to decide whether or not they want to stick with current tax and benefit plans. Their choice will be crucial for millions of families.