In this report, our first dedicated Living Standards Outlook, we explore the prospects for household incomes and inequalities over the next five years. Our annual Living Standards Audit, due to be published in the summer, will focus on historical trends in living standards.
This report projects forwards the real spending power of typical households and the distribution of income to 2022-23. Results incorporate the latest household income data (for 2015-16), what we know about the key drivers of living standards to 2017-18 and the latest forecasts of economic aggregates from the Office for Budget Responsibility (OBR).
The report also explores the extent to which different policy and economic scenarios could affect what is a weak and inequality-increasing outlook for living standards. And it provides, for the first time, a distributional assessment of the impact of increasing minimum pension contribution rates via auto-enrolment.
- Typical incomes stagnated in 2017-18, and are projected to grow slowly over the next five years. Annual income growth is expected to reach only 1.3 per cent by 2022-23 – well below the pre-crisis average of over 2 per cent.
- ‘Low to middle income’ working-age households or the ‘just about managing’ face three years of falling or flat incomes. Over the forecast period, the bottom part of the working-age population is expected to face relatively weak or even negative income growth, with higher and relatively equal growth for the rest (at least in proportional terms).
- Pensions auto-enrolment has successfully boosted the number of pension savers. But minimum contribution rate rises in the next two years place significant downward pressure on disposable income growth for middle-income working-age households.
- Inequality is projected to increase after 2016-17. On some measures inequality is projected to rise to record highs by 2022-23.
- Rather than the strong income growth at the top of the distribution which widened inequality in the 1980s, the next five years are typified by the poorest working-age households getting left behind.
- This dismal outlook is driven by a combination of weak real term pay growth and the increasing impact of large scale cuts to working-age benefits, and comes despite a progressive outlook for the distribution of pay thanks to the National Living Wage.
- Living standards could beat this outlook, however, if policy or economic factors change:
- Tax and benefit policy changescan easily alter the distribution of growth and are in the gift of governments.
- A new surge in employment rateswould boost income growth but only slow the projected rise in inequality.
- An upgrade in the forecast for wages, with a return to pre-crisis rates of pay growth,would greatly improve income growth but – all else equal – further widen inequality.
- Slower growth of private rentswould strengthen working-age incomes and lessen the projected rise in inequality.