Household incomes to grow steadily next year but full recovery not expected until early 2016

Household incomes are set to rise steadily next year but will not return to their pre-downturn level until early 2016, according  to a new analysis published today (Saturday) by the independent think-tank the Resolution Foundation.

The Resolution Foundation’s measure of household incomes, derived from the ONS national accounts, CPI inflation and OBR forecasts, show that household incomes have risen very slightly (£130) from a low of £16,940 per capita in late 2013, but are still £600 (3.3 per cent) below their pre-crisis peak.

Household incomes are expected to grow by 1.7 per cent in 2015 – a welcome return to the levels of steady income growth seen in the mid-2000s though still well short of the strong growth seen at the start of that decade. However, it will take some time to make up for the ground lost over recent years. A return to pre-downturn household incomes is unlikely to occur until early 2016.

Similarly, the Resolution Foundation does not expect household incomes to have returned to the level seen at the time of last election until early 2016, meaning that incomes will end the parliament slightly lower than they started it, despite the recent recovery and expected growth in early 2015.

The Resolution Foundation’s measure of household incomes differs from the ONS’s real household disposable income (RHDI) per capita figure, published in the national accounts earlier this week. This official measure shows a return to pre-crisis levels by mid-2015, and a modest increase over the course of this parliament.

The Resolution Foundation believes that the official RHDI per capita measure is potentially misleading, and risks being misinterpreted, in two key respects. First, it includes the incomes of several non-household organisations, such as universities, charities and trade unions. Secondly, it is adjusted into real-terms using a national accounts deflator that, while technically appropriate for measuring national output, does not fully reflect the inflation experiences of households. The Resolution Foundation measure of household incomes uses a CPI deflator instead – a very commonly used measure of price changes for individuals and households.

This matters because RHDI is widely reported as representing an accurate measure of what is happening to living standards. But the Resolution Foundation analysis suggests that this official measure has understated the depth of the squeeze on household incomes in recent years.

Indeed, the Resolution Foundation’s adjusted measure still presents a rosier picture than the one found in the directly reported surveys of household income that are seen as the best measures of living standards. Both the authoritative Family Resources Survey (FRS) and the smaller Living Costs and Food Survey (LCFS) showed incomes continuing to fall in 2012-13, even as the national accounts based measures started to plateau. But these surveys suffer from lack of timeliness, meaning that no comparison of the more recent period will be possible for some time. Hence the Resolution Foundation has decided to amend the regular measure used by the ONS.

Matthew Whittaker, Chief Economist at the Resolution Foundation, said:
“After years of stagnation it’s encouraging that household incomes are set to rise again through 2015. But household income per capita is still almost £600 lower than it was at the start of 2008 – and this shortfall doesn’t look like being made up until early 2016.

“Household incomes are arguably the best measure of living standards. Timely and accurate data is therefore vital for making informed judgements on an issue that will feature heavily in the upcoming election.

“Unfortunately the official figures – and how they are reported – provide a potentially misleading impression of what’s been happening to households. Our own measure of household incomes remains imperfect – providing no sense of variation in experience across the distribution – but it better captures the true position of British households than the measure that usually gets reported.

“We will hear a lot of claim and counter-claim about living standards over the next five months. In the absence of better statistics, we will have no way of knowing how much of it is true.”
Six years on, household incomes are still lagging their pre-crisis levels

Notes:  RHDI covers income of households and ‘non-profit institutions serving households’ (NPISH) including trade unions, charities and universities. It is deflated using the ‘households and NPISH expenditure implied deflator’. We derive the ‘household income per capita’ measure from the non-deflated National Accounts ‘gross household disposable income’ measure. We make an attempt to isolate household income by looking at the split in expenditure between households and NPISH and applying this ratio to the overall income figure. We deflate using the CPI instead of the implied deflator, in order to better assess changes in living standards. The FRS household income measure captures income as reported in the DWP’s Family Resources Survey and is an average across households rather than per capita. The LCFS household income measure captures income as reported in the ONS’s Living Costs and Food Survey and is an average across households rather than per capita. The two deflators used have different weighting structures and price indices. CPI excludes some elements (such as the imputed rent of owner occupiers) that the National Account deflator includes. Equally, the National Account deflator uses some direct volume measures. Both are statistically robust, but CPI provides a closer picture of the actual changes in prices faced by households.
Source: RF analysis of ONS and DWP, Family Resources Survey

• A detailed note on household incomes is also available from the press office.

For more information contact:

Rob Holdsworth (Director of Communications) on 07921 236 972