IFS Predict Historically Slow Income Growth in Coming Years
The Institute of Fiscal Studies has published a report showing that living standards, particularly among lower-income families, will continue to suffer under the “long shadow cast by the financial crisis” into the early 2020s.
The report was produced for the Joseph Rowntree Foundation, an anti-poverty campaign group headed up by Shelter chief executive Campbell Robb. Based on expected earnings growth, inflation and fiscal policy (both existing and proposed), it predicted median household income to remain unchanged for the next two years and to only be 4% higher than it is currently by 2021-22.
Were earnings to have increased in line with what was expected in 2007 based on long term trend of 2% annual growth, the figure would be 18% higher. This, the IFS explain, “is equivalent to more than £5,000 a year”, and represents a sustained slowdown the likes of which has not been seen for 60 years. These predictions are based on the Office for Budget Responsibility’s expectations for growth in average weekly earnings at around 1% annually.
The report also found that median income for pensioners is set to grow by more that twice the amount that it will for non-pensioners over the next five years (6.8% against 3.3%). After housing costs have been deducted, it found, “median pensioner income is projects to be 7.7% higher than median income for the rest of the population by 2021-22”. This is a stark reversal of the state of affairs in 2007-08, when pensioners’ median income was 10% lower than non-pensioners’.
The IFS also reported that inequality is set to increase over the next half decade, “particularly if incomes are measured after housing costs have been deducted (AHC)”. This is largely down to welfare policies that, despite Theresa May’s promises to provide a government that works for those ‘just about managing’, combine with high inflation to hit the pockets of the already worse off. Due to higher than expected inflation, the four-year freeze on working age benefits introduced last year by George Osborne will mean that the value of those benefits will reduce by 6%, and “housing benefit will no longer cover rent increases faced by low-income private renters”.
“In fact,” the IFS explain, “real AHC incomes are projected to fall between 2014-15 and 2012-22 for the poorest 15% of households on average”.
These, and other planned benefits cuts are likely to reverse the falls in inequality that we have seen in the years since the recession, say the IFS.
Campbell Robb said that these latest forecasts demonstrate the urgency with which the chancellor must act in order to help the millions of families currently “teetering on a precipice”, lest they “fall into poverty and suffer the very real and awful consequences that brings if things do not change”.
He explained that “[o]ne of the biggest drivers of the rise in child poverty is policy choices, which is why it is essential that the prime minister and chancellor use the upcoming budget to put in place measures to stop this happening. An excellent start would be to ensure families can keep more of their earnings under the universal credit.”
A Treasury spokesperson said, after the report was published: “We are taking action to support families with the costs of living by cutting taxes for millions of working people, doubling free childcare for nearly 400,000 working parents and introducing the “national living wage” – a significant pay rise for the lowest earners. More people are now in work than ever before with living standards also forecast to rise over this parliament.”