Living standards set for decade of decline unless Britain charts a new course

Living standards for Britain’s low and middle income households will be lower in 2020 than they were a decade earlier even if growth returns, a new economic analysis suggests. Households in this group are set for income falls of between 3 and 15 per cent from 2008 to 2020.

The study, carried out for independent think-tank the Resolution Foundation by the respected Institute for Employment Research (IER) and Institute for Fiscal Studies (IFS) examines the changing structure of the UK jobs market in tandem with the effects of the tax and benefit system. It produces the most sophisticated modelling yet of the prospects for low to middle income households in the recovery.

The report, Who Gains from Growth?, assumes that GDP recovers steadily and then grows at 2.5 per cent from 2015. Even so, it predicts that without a major change of policy direction, the prospects for low to middle income Britain are bleak and overall inequality is set to rise:

• A low income household[1] had a net income of £10,600 a year in 2008. By 2020 the equivalent low-income household is expected to have an income of just £9,000 a year (at 2008 prices), a real terms decline of 15 per cent
• A middle income household[2] had a net income of £23,000 in 2008. By 2020, the equivalent middle income household is expected to have an income of £22,200 (at 2008 prices), a real terms decline of 3 per cent

The study identifies three main reasons for the stark decline:

• While new jobs are being created, many are at the top and bottom and fewer are in the middle. By 2020 Britain can expect 2 million more jobs in high-paid professional and managerial occupations but also growth in low skilled service roles, with more than 700,000 new jobs in retail, caring and leisure. Meanwhile, traditional jobs in the middle—from administrative work to skilled manufacturing—are drying up;
• Changes in the way work is spread out between households, with employment or working hours looking likely to grow in higher income households faster than in households with lower incomes
• Existing plans for the tax-benefit system, which will see households that receive government support—particularly those with children—falling steadily further behind. The most important of these is the indexation of benefits and tax credits to Consumer Prices Index (CPI) inflation rather than the Retail Prices Index (RPI). The report assumes no further cuts beyond those already announced, including no further cuts to welfare.

Yet while the main scenario is gloomy, the study also considers how things could be different. Learning from approaches that have been successful in other countries and in the past in Britain, it looks at the difference that would be made by: raising female employment to the level of better performing countries in the OECD, raising the quality and quantity of skills in the bottom half of the workforce and boosting wages for the lowest-paid.

Made in isolation, each change has only a modest impact but the combined effect is highly significant. Under this combined scenario, income for a typical middle income household will be £1,600 higher in 2020 than on Britain’s current path. Furthermore, under this combined scenario income is set to fall between 2008 and 2020 across only 22 of the distribution of households, rather than across 52 per cent on the current path.

The report comes as the Resolution Foundation’s Commission on Living Standards, an independent investigation into the pressures facing people on low to middle incomes, prepares to release its final report in the autumn.

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

“This is a powerful wake-up call – it gives us the most detailed account to date of the bleak outlook for living standards over the next decade if we fail to tackle some of the underlying weaknesses in our economy. It suggests that millions of families will struggle, to an extent we have not seen in other periods of growth, to progress and raise their incomes.  It’s particularly sobering that this outlook is based on optimistic assumptions about growth in the economy with a steadily rising number of people in employment.”

“Just as importantly, the study suggests some of the positive choices that could be made that, if taken together, could make a major difference to the living standards of millions of low and middle income households over the next decade. It provides us with both a stark warning and the outline of an alternative path”.

Professor Mike Brewer, research fellow at the IFS, said:

“This analysis confirms the strong currents that will be pushing against income growth in the next ten years, even once a recovery in GDP takes hold.

“Britain looks likely to see continuing polarisation in our labour market as more high- and low-paid jobs are created, skewing the distribution of income growth towards higher income households.  Meanwhile, support through the tax and benefit system is set to fall over the long-term, particularly because of the decision to link tax credits and benefits to the lower Consumer Prices Index measure of inflation, meaning that lower income households will tend to fall behind.”

Notes to editors

1. 1.   Who Gains from Growth? Living Standards to 2020 is the result of research carried for the Resolution Foundation by the Institute for Employment Research and Institute for Fiscal Studies, building on a major piece of work funded by the Joseph Rowntree Foundation (JRF) and the UK Commission for Employment and Skills (UKCES). The full report is available in advance to the media from the Resolution Foundation press office and can be downloaded on publication from www.resolutionfoundation.org
   
2. The assumptions of GDP growth underlying the study are for average annual growth of 1.9 per cent from 2011 to 2015 and of 2.5 per cent per annum from 2015 to 2020 – more optimistic than the latest projections from the Office for Budgetary Responsibility
3. For more information about the Commission on Living Standards, visit www.livingstandards.org

[1] At the 10^th percentile (figures are for a couple with no children)

[2] At the median of the income distribution (again, a couple with no children)