Britain on course for biggest increase in inequality since Thatcher 1 February 2017 Squeeze on poorer households, rather than 80s-style boom for the rich, driving 21st Century inequality Britain is on course for a major living standards slowdown, with typical households seeing almost no income growth over the remainder of this Parliament, according to the Resolution Foundation’s annual audit of living standards published today (Wednesday). A particularly tight squeeze on poorer households will actually see their incomes fall and is set to drive the biggest rise in inequality over a parliament since Margaret Thatcher’s time in Downing Street. The report, Living Standards 2017, analyses the past, present and future outlook for living standards across Britain. It shows that the UK’s recent mini-boom in living standards – in which typical household incomes (before housing costs) grew by over 2 per cent in both 2014/15 and 2015/16 – has ground to a halt as a result of rising inflation and a plateauing of employment in recent months. Typical household income growth looks set to fall to 1.2 per cent this year (2016/17). The Foundation’s forecast for living standards over the parliament, which combines the OBR’s latest projections for pay, prices and employment with the impact of government policy, shows that this slowdown is set to continue. Stagnation in pay growth, which is forecast to bite towards the end of 2017 as inflation rises further, coupled with the rollout of more than £12bn of welfare cuts, means that typical household incomes after housing costs are set to grow by a meagre 0.5 per cent a year over the next four years. The report shows that while the scale of this living standards slowdown is largely driven by wider economic factors such as rising inflation and flat productivity, the unequal impact of the upcoming squeeze is the result of government policy on tax and benefits. While richer households were most affected by the pay squeeze in the wake of the financial crisis, the report shows that the richest fifth of households are set to enjoy small incomes gains of around 4 per cent over the next four years, while incomes across the entire poorest half of households are set to fall by an average of 3 per cent. This would make the current parliament the worst on record for low and middle households since comparable records began in the 1960s, with poorer families with children particularly affected. A typical family with children is set to have a lower disposable income (after housing costs) in 2020-21 (£18,300 in current prices), than a typical family this year (£18,900). This reinforces the case for Theresa May’s welcome focus on ‘just managing families’. This sharp divergence in income growth between richer and poorer households means the UK risks seeing the largest rise in inequality since the last Parliament when Margaret Thatcher was Prime Minister. This increase is set to undo modest falls since the financial crisis and could leave levels of income inequality at a record high by the end of the parliament. The Foundation notes that the OBR forecasts are uncertain – and that lower inflation, stronger pay growth or further increases in the employment rate could significantly strengthen income growth over the parliament. Equally, with many forecasters predicting that inflation will rise well above the OBR’s expected peak of 2.6 per cent in 2018, the squeeze could be even tighter. Torsten Bell, Director of the Resolution Foundation, said: “Britain has enjoyed a welcome mini-boom in living standards in recent years. But that boom is slowing rapidly as inflation rises, productivity flatlines and employment growth slows. “The squeeze in the wake of the financial crisis tended to hit richer households the most. But this time around it’s low and middle income families with kids who are set to be worst affected. “This could leave Britain with the worst of both worlds on living standards – the weak income growth of the last parliament and rising inequality from the time Margaret Thatcher was in Downing Street. “The Prime Minister’s focus on supporting just managing families is absolutely right if we are to avoid the next few years being like the 1980s without the feel-good factor.” Adam Corlett, Economic Analyst at the Resolution Foundation, said: “The healthy growth in household incomes of recent years was driven by historically low inflation and fast-rising employment. But as these factors fall away the living standards picture of this parliament will turn from recovery to stagnation. “Many of the key factors behind this latest stagnation in living standards, particularly inflation, lie outside the government’s control. “But from reigniting employment growth to rethinking welfare policy, there is still plenty that the government can do to boost living standards over the parliament. “Pressing ahead with big minimum wage increases, and following through with the ambition shown in the government’s Green Paper on Industrial Strategy to spur a fresh productivity drive in low paying sectors, are also key”.
