Squeezed Britain 2013

Published on Shared Growth

We now know that the squeeze on living standards will be longer and deeper than projected this time last year. Average wages are not expected to rise in real terms until late 2014 after a period of stagnation and decline. Despite stronger than expected job growth in the private sector, many people continue to work fewer hours than they would like, putting downward pressure on household incomes. The challenge is how we ensure that the benefits of future growth are fairly shared.

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We now know that the squeeze on living standards will be longer and deeper than projected this time last year. Average wages are not expected to rise in real terms until late 2014 after a period of stagnation and decline. Despite stronger than expected job growth in the private sector, many people continue to work fewer hours than they would like, putting downward pressure on household incomes.

If this were not gloomy enough, further problems are being stored up. The incremental impact of changes to the uprating of benefits and tax credits will become visible over time in poverty statistics. And with further reductions in public spending anticipated in this year’s spending review, there will be profound challenges for services, as well as deeper cuts to welfare spending.

The upshot of this on-going economic malaise for Britain’s households is that an already difficult situation will get worse before it gets better. To some extent, all families have been affected since the recession. Indeed, new data shows that, although the very wealthiest have pulled away from low, middle and upper- middle income households over the longer term, in 2010-11 real incomes fell right across the income distribution and most of all at the very top rather than in the middle or bottom. And, while tax and benefit changes have in general hit poorer working-age households harder than richer households, particularly those with children, it is the very richest that have seen the biggest falls of all since 2010. 

As a result, the latest year saw the biggest decline in income inequality in the last 50 years. Whether this pattern will be replicated in future years remains to be seen.

Of course, households in work but on below middle income, especially those with children, start with far less than the better off, making any squeeze particularly hard to cope with. With wages falling and tax credits no longer providing the support they did in the 2000s, these households with an average income of only £21,000 after tax face a daily struggle to keep up with the rising costs of essentials. Meanwhile, longer term goals such as saving or buying a home are drifting further from reach. These households are the focus of this report.

The causes of the economic challenges facing households are complex and entrenched. It is, therefore, inaccurate and unhelpful to imply that the current squeeze on households is all down to ‘austerity’. The origins of this story stretch back before the recession and cannot be attributed to a single period of government. The challenge is structural as well as cyclical. In the five years prior to the financial crisis of 2008, all but the richest 10% of households failed to benefit adequately from economic growth. Looking forward, we have a long way to go simply to get back to where we were before the downturn, to bring living standards back to their level in the mid-2000s. Above all, the challenge is, as we inch towards a long awaited recovery, how to ensure that the benefits of future growth are fairly shared.