The Living Standards Audit 2018

24 July 2018

Adam Corlett

Stephen Clarke

Conor D’Arcy

John Wood

Every year the Resolution Foundation publishes an ‘audit’ of living standards in the UK. As part of this we estimate how household incomes have performed over the past year, producing a ‘nowcast’ of the figures before the official data is released. In addition this, this year we have taken a look at the under-reporting of benefit income in the official survey data, correcting this under-reporting (as we have done) has big implications for our understanding of living standards.

Key findings

Based on our ‘nowcast’ we estimate that typical incomes increased by just 0.9 per cent (after housing costs) in 2017-18. This is extremely weak, representing less than half the average annual growth rate recorded between 1994 and 2007.
The combination of a benefit freeze and above-target inflation means that we estimate that real household incomes fell by 0.5 per cent to 1.5 per cent among households in the bottom third of the income distribution in our estimate. And incomes in the top half are estimated to have grown by around 0.4 per cent. Such a hit to living standards is clearly worrying, particularly coming so soon after the last recession.
While it is of course difficult to have certainty about any single year change in poverty (due to the limitations of surveys), there are good odds that 2017-18 delivered a notable increase. Relative child poverty may have risen to its highest rate in at least 15 years, despite high levels of employment.
We have delved deeper into the way in which income is captured in the government’s ‘gold standard’ household surveys – the Family Resources Survey (FRS) and related Households Below Average Income (HBAI). We find that £37 billion (almost £1 in every £5 spent) of benefit spending is under-reported.
Worse, this gap has grown in significance over time. For working-age households, the gap has grown from under 2 per cent of their (reported) household income around the turn of the millennium to over 4 per cent in the 2010s. And for pensioners, for whom benefits are typically a larger share of income, the gap has grown over recent years to 8 per cent.
Given this under-reporting, we present an adjustment process for the HBAI data. This primarily involves a mix of scaling up the value of benefits reported and allocating money to people who don’t report benefit receipt but appear to be likely candidates. This is done for every major benefit in every year from 1994-95 to 2016-17. Following the adjustment, median income after housing costs is 6 per cent (or £1,300) higher in 2016-17. And while HBAI has shown for quite a few years that the typical pensioner now has a slightly higher household income than the typical non-pensioner, this gap is larger following adjustment, with median non-pensioner income revised up by 5 per cent and median pensioner income revised up by 10 per cent.
Growth figures are also affected. For the typical non-pensioner, real income growth between 1999-00 and 2014-15 is revised up slightly from 17 per cent to 22 per cent, with ‘missing growth’ concentrated in the mid-2000s. There are – predictably – even larger changes for poorer households.
Our rough adjustment lowers measures of inequality in every year, with the Gini coefficient in 2016-17 falling from 38.7 per cent to 35.7 per cent (after housing costs) as a result. As noted in previous work however, known underestimates of top incomes mean that inequality is understated, partially counteracting this. Inequality trends also improve slightly following our correction, though the big picture remains one of little change since the very large increases of the 1980s.
The largest effect however is on our understanding of poverty. Our modelling reduces the number of people in relative poverty (after housing costs and excluding Northern Ireland) from 13.9 million (22 per cent) to 11.4 million (18 per cent). The proportion of children in poverty falls from 30 per cent to 24 per cent, and pensioner poverty falls from 16 per cent to 11 per cent.
This is a large change of course, but the more important finding relates to what our adjustment does to poverty trends. In particular, the drop in child poverty rates between 1999-00 and 2004-05 grows from 5 percentage points to 9 percentage points. This revision – though not the final word – may have implications for past poverty goals. On our figures it seems quite likely that the goal to reduce the number of children in poverty by a quarter by 2004 was met rather than missed, and the 2010 goal (for a halving) was not far off. On the other hand, the rise in relative child poverty since 2011-12 may have been slightly faster than the official figures suggest.

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