How far have living standards recovered?

What’s the truth behind the Chancellor’s Budget claim that “the latest projections show that living standards will be higher than when we came to office”? With so many alternative ways of capturing ‘living standards’ the answer is that they might be higher, lower, or just about the same. Given that this issue is going to be debated a fair bit, it’s worth taking some time to go through the different possible measures and what they tell us.

The measure pointed to by the Chancellor is the ONS figure for Real Household Disposable Income (RHDI) per capita. The latest figures relate to Q3 2014, at which point average incomes remained just over 1 per cent below the level they were at in Q2 2010 when the government took office. Projections from the OBR suggest that the measure has improved rapidly since then, passing the Q2 2010 level at the start of 2015 and continuing to grow since.

But – as we point out in our guide to living standards at the election – RHDI is a bit of an odd measure. It includes a number of things that don’t relate to households (such as the incomes of universities and charities). And, more importantly in terms of its impact on the numbers, it includes a measure of imputed rents (the rent that homeowners might receive if they didn’t live in their own home). That’s an important adjustment when looking at the National Accounts – which is the purpose of RHDI. But it’s debatable how much relevance it has to perceptions of living standards among families. RHDI does, however, have the merit of being timely – which is one reason it tends to get reported – and via the OBR we have an official forecast of it over the next few years.

The more authoritative data on household income is drawn from directly reported surveys, with the Family Resources Survey (FRS) being the largest and most trusted. This is the source that we (and many other organisations) prefer to use in assessing living standards. Unlike RHDI it allows us to look at changes in incomes across the distribution. Unfortunately, the latest data relates to 2012-13, making it difficult to test the veracity of the Chancellor’s claim. However, we presented new analysis last week that rolled the 2012-13 data forward into 2014 by using a ‘now-casting’ technique that applies known changes in earnings and employment levels across different groups in the intervening period.

The measure of FRS most comparable with the RHDI per capita is the mean – because this captures average incomes. The outturn FRS data showed that it continued to fall in 2012-13, even as the RHDI measure increased. Our estimate is that it recovered slightly after 2012-13, but that it remained below its 2011-12 level in 2014. Switching instead to a measure of median income (again using the FRS and our now-cast estimate), it appears that incomes rose in 2012-13 and 2014. Counter to many people’s expectations, the median has recovered more quickly than the mean – that’s because over recent years the fastest growth has been in the middle of the income distribution (what we call the ‘unsqueezed middle’).

So these two FRS measures – the mean and the median – tell different stories. And both are different to RHDI. But there’s a further challenge. Because the FRS data is captured annually (on a rolling basis, rather than in any given month), it is open to argument as to which year offers the best benchmark when considering the question of living standards over the course of the parliament.

Taking 2009-10 as the starting point (that is, the average income level that prevailed just before the government took office), our projections suggests that mean incomes (again, comparable with the RHDI measure) were 5.4 per cent down in 2014. They will have improved since then, but are very unlikely to be back where they were. Taking 2010-11 as the benchmark instead (that is, the average income level recorded in the first year of the current parliament), we find that mean incomes were 3.6 per cent lower in 2014. Again, it appears unlikely that this gap has been bridged over recent months.

But if we repeat this process for median incomes, we find they were 2.6 per cent below their 2009-10 level in 2014 and just 0.2 per cent lower than in 2010-11. On the former basis, they are unlikely to break-even by May. But if we take the 2010-11 baseline then the difference is quite likely to have been made up by now, meaning that on this specific measure, and using this time comparison, living standards are likely to have recovered.

Finally, if we use 2007-08 as the benchmark year instead – a point which is more likely to resonate with households as the start of the downturn – RHDI per capita is projected to have recovered its previous position, ‘median FRS incomes’ look likely to break-even at some point during 2015, while ‘mean FRS incomes’ are unlikely to return to their pre-crisis level for some time.

So to a degree you can pick a measure and get the result you want. What’s clear is that on all three measures, incomes are improving. What’s equally clear is that they are all a long way short of where we would have expected them to be in the absence of a downturn of the depth and severity just experienced. And – as we showed in our analysis last week – there has been a divergence of experience across households and across the regions and nations of the UK. The debate about how best to measure living standards will no doubt rumble on – not helped by the variety of available measures – but it’s questionable just how much any of these aggregate measures chime with the experiences of individual households.