Household incomes will start rising in 2015 – but painfully slow recovery means many years before losses are restored

Household incomes are set to start rising again in 2015 after six years of decline according to a new report from the Resolution Foundation. The findings come in a detailed and authoritative assessment of the state of living standards in Britain.

The report from the independent think tank also finds that growth in disposable income for the typical household is likely to be modest, barely positive in 2015-16 and less than one per cent a year for each of the following three years. As a result, despite improving, the living standards of the typical household will still be 3.5 per cent lower in 2018-19 than they were at the start of the financial crisis of 2008, only just inching above the level they were last at in 2005-06.

The report, The State of Living Standards, concludes that households have taken a large and permanent hit to their living standards from an unprecedented squeeze. Had income growth continued at the rate seen in the decade before the crisis the median disposable income among all households would have been £30,300 in 2018-19, a third higher than the £22,900 which is now projected.

With living standards set to be a key political battleground over the next year, the report notes that much rests on how voters define a ‘recovery’. It sets out new polling, carried out for the Resolution Foundation by YouGov, which shows the public are broadly split between two views of the recovery:

– 39 per cent say a ‘recovery in living standards’ requires their incomes to start rising again after recent falls. The report suggests this is likely to be fulfilled by 2015

– 46 per cent say a ‘recovery’ requires incomes to be restored to their pre-crisis level—something that the report shows will take much longer

Incomes may turn a corner by 2015 but are likely to grow slowly for years

By drawing together forecasts for wages as well as known changes to taxes and benefits, the report is able to set out the first full story of living standards during the crisis years and their likely path in the recovery. It finds that:

· Median household income fell by 5.4 per cent from 2008-09 to 2011-12, a slump that has felt all the worse due to surprisingly weak income growth in the mid-2000s. Among low to middle income households the fall was slightly bigger (6.6 per cent)

· During 2013-14 and 2014-15 household incomes are likely to remain broadly flat. Typical (median) household disposable income is projected to be as low as £22,300 in 2014-15, its lowest point in a decade

· Typical household incomes are projected to rise very slowly – 0.2 per cent in 2015-16 and then slightly faster in subsequent years. This period of slow income growth would mean that the typical household has around the same level of income in 2018-19 as in 2005-06

· The poor prospects for real income growth are due to a combination of weak real wage growth and reductions in state support because of fiscal consolidation. Typical pay among full-time men is expected to remain 4.7 per cent below its 2008 level even by the end of the projection period in 2018. Typical pay among full-time women, assuming that the gender pay gap continues gradually to narrow, would be expected to regain its pre-crisis level around 2017

· The downturn played out very differently across the UK and accentuated regional inequalities. London and the South East performed strongly while other nations and regions were hard hit. London represented 22 per cent of the UK’s economy in 2008 yet accounted for only 1 per cent of the decline in the UK’s GDP between 2008 and 2012. The South East, represented 14 per cent of the economy in 2008 and didn’t account for any of the fall in the UK’s GDP. By contrast, Scotland representing 8 per cent of the economy, accounted for 19 per cent of the fall. Yorkshire and Humber, representing 7 per cent of the economy, accounted for 16 per cent of the fall

· In terms of GDP per head, which better captures living standards, a different picture emerges. Per capita GDP was still falling in 2012 in 10 of the regions and nations of the UK. The worst affected was Northern Ireland, where it fell by 10 per cent between 2008 and 2012, while Scotland, Yorkshire and Humber and the East of England all saw per capita falls of more than 6 per cent. So too did London, due to its growing population in this period

An unprecedented squeeze is changing the life a typical family can afford

As well as detailing trends in living standards, the report reveals in the richest detail to date how an unprecedented fall in incomes is changing the life a typical working household in Britain can afford to live:

· A combination of falling wages and rapidly rising food and fuel prices has made essential items far harder to afford. In 2007 a minimum wage worker needed to work for 96 hours to pay for the average gas bill (even assuming they earned too little to pay tax). By 2013 they had to work 138 hours to pay their gas bill—more than an extra week (42 hours) of work

· A large number of Britain’s 7.6 million low to middle income families are now living close to the edge. Two thirds have less than one month’s income in savings. Nearly three quarters of low to middle income working age adults who have had a job have either no pension or a frozen pension

· Despite rock-bottom interest rates the proportion of mortgagors that have less than 5 per cent of their gross income left at the end of the month rose from 6 to 11 per cent from 2007 to 2013.This is a sharper rise than among non-mortgagors (from 5 to 7 per cent), reflecting a combination of squeezed incomes, high debt levels and the fact that the gains from low rates have not been passed on in full

Without stronger wage-growth a sustainable recovery remains in doubt

The Resolution Foundation notes that its findings raise concerns not just for households but also for the wider sustainability of the economic recovery. The OBR’s current forecasts for GDP up to 2018 assume a consumption-led recovery. Because of weak income growth this requires households to steadily run down their savings ratio.

In order to avoid this savings-draining recovery, incomes would have to rise more strongly and, with state support falling, this can only come from stronger wage growth or even faster increases in employment levels. The report poses two scenarios:

– In order for a wage-led recovery to support forecast levels of GDP without eroding household savings, this would require a return to annual real wage growth of just under 2 per cent. While much higher than is currently forecast, such levels of wage growth are in line with those seen in the late 1990s and early 2000s.

– In order for an employment-led recovery to support GDP given the current weak forecasts for earnings, an additional 900,000 people (over and above the OBR forecast) would need to enter employment by 2018, equivalent to an employment rate of 61.5 per cent. This would be higher than any rate since the 1970s.

The scenarios suggest the extent to which weak wage growth is an obstacle to a sustainable recovery. Without stronger wage growth than currently forecast, or a surprise pickup in business investment, only an extraordinarily high rate of employment Britain could avoid a savings-led recovery.

Gavin Kelly, chief executive of the Resolution Foundation, said :

“The question of who will benefit from recovery – by how much and how soon – will be a key issue at the 2015 election and into the next Parliament. Our evidence suggests that the fall in living standards is bottoming out and should start to rise again next year. That’s the good news and given year after year of decline it will come as a relief. But as things stand the recovery for families looks like being painfully slow – by 2018 we expect the typical household to still be worse off than they were before the crisis.

“The hit to our living standards will take many years to repair. Our goal must be a widely shared recovery that sees the living standards of low to middle income Britain making up some of the lost ground of recent years as their income rise in line with overall economic growth. That still feels some way off.”

James Plunkett, director of policy at the Resolution Foundation, said:

“Despite the strengthening recovery it looks like we’re set for several years of very weak income growth. It’s increasingly clear that the long downturn has permanently changed the course of living standards, with effects continuing to play out.

“As things stand, the recovery rests on consumer spending. And that spending rests on a diminishing savings rate, not income growth. With so many households already struggling with their debts – even with rates still low—a savings-led recovery is not a happy prospect.”

The State of Living Standards will be published by Resolution Foundation on Tuesday 11 February. It will be launched at an event at 1 Birdcage Walk, London SW1.

Ends

For more information contact:

Warwick Smith (head of communications) 020 3372 2959 or 07443 042722 warwick.smith@resolutionfoundation.org  

Notes

1. All of the projections cited here are based on the lower CPI measure of inflation and would look significantly worse under the RPI measure.

2. The report uses the most recent data available. Sometimes this relates to 2013 and sometimes to 2011-12. Wherever possible, the report extrapolates to show what the statistics are likely to mean for living standards now and over the medium term.

3. The Resolution Foundation projections take account of all changes to taxes and benefits that have been announced and scored by the Treasury but not of unallocated cuts such as the proposed £12 billion of further cuts to the welfare budget which have been proposed for the first two years of the next Parliament.

4. Where reference is made to ‘regional GDP’ this actually designates Gross Value Added, a measure which corresponds closely to GDP but excludes the value of taxes and subsidies on products. Reference to falls in GVA by region are as a percentage of the overall fall which can be allocated to a region – a further portion of falling GVA is not allocated to any region.

5. Polling figures are from YouGov Plc. Total sample size was 1,942 adults. Fieldwork was undertaken between 3-4 February 2014. The survey was carried out online. The figures have been weighted and are representative of all GB adults (aged 18+).

6. The Resolution Foundation is an independent research and policy organisation that works to improve the lives of people on low to middle incomes.

7. Households on low to middle incomes, accounting for about a third of the UK working-age population, are defined by the Resolution Foundation as those working age relying mainly on earned resources but with below-median UK income. In practice this can mean households with an equivalised gross income of between £13,000 and £42,000 – depending on the number of children in the family – and comprises about 10 million adults and 5 million children.