Amid a busy week in politics, the publication this week of new data showing that average household income per person has fallen in each of the last four quarters has passed somewhat unremarked upon. As the chart below shows, annualised income fell by 0.3 per cent in the second quarter of this year relative to the first, following declines of 0.5 per cent, 0.8 per cent and 0.8 per cent again in the three preceding quarters.
As a result, annual income per person is now estimated to be 2.3 per cent lower than it was a year ago. While not quite as tight as the living standards squeeze that took hold immediately following the financial crisis, declines of such magnitude are unheard of in normal times.
Of course, the fact that the turning point for income growth came in the third quarter of 2016 – immediately following the EU referendum in June – will strike some as no coincidence. After all, we know that the spike in import-led inflation that flowed from the sharp post-referendum devaluation of sterling has acted as a headwind in 2017. Most visibly, it has blown real-earnings growth back into negative territory and heightened the impact of the government’s four-year freeze in working-age benefits.
With uncertainty continuing to weigh on investment decisions within firms and with softening consumer confidence, it’s hard to escape the conclusion that Brexit (in the near-term at least; the ultimate impact of Brexit remains entirely unknown at this stage) is playing a key role in the apparently sizeable decline in living standards that has occurred over the past year.
Yet that is far from all of the story. Look again at the growth figures on the chart and what stands out is the positive spike that arrived in the middle of 2015. In the year immediately prior to the referendum, income per person rose by a healthy 3.5 per cent. Viewed over this longer timeframe, some of the slowdown in 2016-17 might simply represent a reversal of the above-trend gain recorded in 2015.
Indeed, this is precisely what has happened. Faced with the prospect of increases in dividend tax from April 2016, many firms paid additional dividends in the 2015-16 tax year. Along with potentially lowering subsequent dividend payments in 2016-17, this move also increased the self-assessment tax payable on such payments in the first quarter of 2017 – further depressing income growth at the start of this year.
We can’t put a precise figure on this effect, but helpfully the latest ONS data comes with a methodology change that provides some clues. This revision improves the way in which the ONS records dividend payments. As the next chart shows, it has both substantially increased the magnitude of dividend payments flowing to households (with a particular increase in the recording of dividends paid to owner-managers of incorporated businesses) and shone a light on the tax-related shift between 2015 and 2016.
As a thought experiment, we can strip the dividend payments out of the headline household statistics in order to better understand the underlying trend in income growth. This is imperfect of course – recent increases in dividend payments will in part have acted as a replacement for wage income – but it is a useful exercise. That’s because it is perhaps more indicative of the experience of the majority of UK households, where dividend payments have little if any presence.
The final chart shows the difference this makes. We still see strong growth in 2015-16 followed by a contraction in 2016-17, but the contrast between the two periods is now less marked. Income per person falls by 1.2 per cent in the year following the referendum – roughly half the scale of decline reported in the headline measure.
Tax-related shifts in the timing of dividend payments therefore appear to tell at least some of the story of the fall in living standards experienced over the past year. But they don’t explain all of the fall. ‘Project fear’ may have been discredited, but the near-term numbers still look quite scary.
The bigger picture here is that household income per person remains no more than 5 per cent higher today than it did a decade ago. The decade before the crisis delivered growth in the region of 30 per cent. It’s easy to fixate on the impact on Brexit, but it shouldn’t blind us to other domestic challenges that have led to a tough ten years for living standards, let alone the last 12 months.
Looking forward, incomes are set to fall further before they rise. Inflation remains on course to outpace earnings growth for the remainder of 2017. Absent any change in government policy, the real-terms values of public sector pay and working-age benefits face erosion over the next few years. And the outlook for productivity growth – ultimately the main engine of sustainable long-term growth in earnings and incomes – remains highly uncertain.
The OBR looks set to adopt a more pessimistic stance by downgrading its productivity projection at the forthcoming budget. That decision is being driven not by an assessment of lower productivity in a post-Brexit world (previous OBR outlooks have already incorporated some such assumptions), but rather by the conclusion that post-crisis productivity stagnation is more permanent than previously thought. That would be bad news for the Chancellor’s fiscal outlook, and – if borne out – bad news too for household incomes.
Faced with such gloom, the Prime Minister’s conference speech – for all its problems – was right to remind us of the country’s non-Brexit fundamentals. Fixing the broken parts of the UK’s economy – from productivity to housing to skills – would have been the central challenge even in the absence of Brexit. Delivering Brexit is an additional task for the coming years rather than an alternative one. The concern is that – as with the speech itself – the government’s focus will be too easily derailed by unwelcome distractions.