Detailed data about household incomes comes with a considerable lag. And while the Office for Budget Responsibility (OBR) produces economic forecasts for the next five years, these only tell us about averages. In this, our second dedicated Living Standards Outlook, we combine survey data, OBR forecasts, the government’s tax and benefit policies, and more, to project household income growth for different groups.
- Our ‘nowcast’ suggests that the Article 50 period (so far) – 2017-18 and 2018-19 – has not been a good one for household income growth. We estimate that the median real non-pensioner income did not grow over this period. We await official survey data, but incomes in the bottom half may have fallen due to high inflation and the benefit freeze, amid the broader economic context of stalling business investment and continued policy uncertainty.
- There has been better news for households recently. Inflation has fallen, nominal annual pay growth is at its highest since 2008 (though still relatively low), and the employment rate has continued to increase over the Article 50 period. There are also signs of a small recovery in home ownership rates, and a slowing of private rent increases.
- Even with these trends, and without assuming a negative ‘no deal’ Brexit, the outlook for household incomes is weak. Typical non-pensioner incomes are projected to remain stagnant over 2019-20 and 2020-21 as a whole, and rise by an average of 0.7 per cent a year in the following three years. Continued weakness can be ascribed to official projections of poor wage growth, significant welfare cuts, the effect of pension auto-enrolment on both employers and employees, an assumed end to significant employment rate increases, and a forecast rise in mortgage costs.
- The outlook for typical incomes is worse for some groups, such as families with children, single adults, social renters and mortgagors. With a new stagnation coming on top of the financial crisis and (for many) a pre-crisis slowdown, income growth over the entire 20 years from 2003-04 to 2023-24 is currently projected to be close to zero for some groups – including low to middle income working households.
- Child poverty is projected to rise by a further 6 percentage points by 2023-24, which (on existing data) would mark a record high, even surpassing the highs of the 1990s. The proportion of parents living in poverty is also forecast to hit a record high.
- In our projection, the majority of children who either have a single parent; are in larger families; are in a household where no-one is in work; or live in private or social rented housing, will be in poverty by 2023-24. But poverty rates for other groups are also projected to rise. The child poverty rate for working households averaged 20 per cent between 1996-97 and 2013-14, but is projected to increase to 29 per cent by 2023-24, while the poverty rate for children living with two parents may have already hit a record high in 2017-18 or 2018-19.
- The UK is not projected to meet its Sustainable Development Goal target on inequality over the forecast period, with income growth for the poorest 40 per cent expected to remain lower than overall growth rather than exceeding it.
- Higher than forecast earnings growth would of course improve the living standards outlook – and provide additional tax revenue too. And in the short term the OBR’s 2019-20 earnings forecast now looks slightly pessimistic. But stopping child poverty from rising further will require large policy changes to improve Universal Credit and better support families.