UK households have taken a £1,500 income hit since the EU referendum

Household incomes are around £1,500 a year lower today than they were expected to be before the Brexit referendum – with the UK having experienced the sharpest income growth slowdown of any economy for which the OECD publish data – according to a new Resolution Foundation analysis published today (Monday).

Counting the cost – which forms part of the Foundation’s annual Living Standards Outlook that will be published later this month – focuses on the UK’s economic performance since the EU referendum. However, it also goes beyond the usual focus on GDP to look at the impact on household living standards across the UK.

The briefing comes ahead of the latest official GDP figures published at 9.30 this morning, which are expected to show that growth in the final quarter of 2018 slowed to 0.3 per cent – less than half the UK’s long-term trend growth rate of 0.7 per cent. This would mean that by the end of 2018, the UK economy was 1.1 per cent (or £23bn) smaller than the OBR’s pre-referendum forecast in March 2016, a figure that is equivalent £800 for every household in the UK.

The briefing shows that while the UK economy today faces headwinds from a recent global growth slowdown, our underperformance since 2016 is largely a UK-specific issue, with global growth over the whole period actually outperforming pre-referendum expectations. The UK has gone from being one of the fastest growing economies in the G7 pre-referendum, to one of the slowest.

However, the Foundation notes that focusing simply on slower than expected GDP growth is insufficient for those wanting to understand the impact of the both the referendum, and the political uncertainty that has followed, on family finances. The briefing shows that the UK’s strong performance on employment since the referendum has been outweighed by higher inflation and weaker nominal pay growth, which culminated in the unwelcome return of falling real pay and household incomes.

Counting the cost shows that, by the end of 2018, real household disposable income was £1,500 a year lower than the Office for Budget Responsibility’s pre-referendum forecast – with over half of this income hit due to higher than forecast inflation. It adds that while income growth across most advanced economies has underperformed in recent years, the UK has experienced the biggest slowdown of all, from 4.9 per cent in 2015 to -0.1 per cent in 2017. Had household incomes grown in line with other advanced economies they would have been £2,000 higher in 2017.

The Foundation adds that reasonable people will disagree about exactly how much of the post-referendum income hit they wish to attribute directly to the UK’s vote to leave the EU, but that it is very hard to escape the conclusion that it is by far the single biggest cause.

While the eventual impact of Brexit on living standards will be determined by the UK’s long term relationship with the EU, families are being affected in the here and now. And with rising political uncertainty feeding through into measures of economic uncertainty, the size of the hit to family incomes today is being affected not just by the kind of Brexit we choose, but the process by which we get there.

The Foundation says that whatever people’s view on Brexit, this research should encourage policy makers to recognise how much is at stake in the UK at present – and that how the country goes forward, not just where it is heading to, matters for household living standards.

James Smith, Research Director at the Resolution Foundation, said:

“Two and a half years since the UK voted to leave the European Union, the country’s post-Brexit position remains far from clear. There has been much discussion about the impact of this uncertainty on businesses, but not enough about its effect on household incomes.

“The UK’s stark under-performance on income growth since 2016 – which has tailed off more than other advanced economies – has left UK households taking a £1,500 hit to their living standards.

“As we approach ‘Brexit day’ on 29 March, politicians in all parties needs to recognise how much is at stake for family living standards and that how the country goes forward, not just where it is heading, matters for household incomes in the here and now.”