Household incomes are set to start rising again in 2015 after six years of decline according to a new report from the Resolution Foundation.
The report from the independent think tank also finds that growth in disposable income for the typical household is likely to be modest, barely positive in 2015-16 and less than 1% a year for each of the following three years. As a result, despite improving, the living standards of the typical household will still be 3.5% lower in 2018-19 than they were at the start of the financial crisis of 2008, only just inching above the level they were last at in 2005-06.
The report, The State of Living Standards, concludes that households have taken a large and permanent hit to their living standards from an unprecedented squeeze. Had income growth continued at the rate seen in the decade before the crisis the median disposable income among all households would have been £30,300 in 2018-19, a third higher than the £22,900 which is now projected.
With living standards set to be a key political battleground over the next year, the report notes that much rests on how voters define a ‘recovery’. It sets out new polling, carried out for the Resolution Foundation by YouGov, which shows the public are broadly split between two views of the recovery:
- 39% say a ‘recovery in living standards’ requires their incomes to start rising again after recent falls. The report suggests this is likely to be fulfilled by 2015
- 46% say a ‘recovery’ requires incomes to be restored to their pre-crisis level—something that the report shows will take much longer
- Incomes may turn a corner by 2015 but are likely to grow slowly for years
The report found that median household income fell by 5.4% from 2008-09 to 2011-12, a slump that has felt all the worse due to surprisingly weak income growth in the mid-2000s. Among low to middle income households the fall was slightly bigger (6.6%).
During 2013-14 and 2014-15 household incomes are likely to remain broadly flat. Typical (median) household disposable income is projected to be as low as £22,300 in 2014-15, its lowest point in a decade.
Typical household incomes are projected to rise very slowly – 0.2% in 2015-16 and then slightly faster in subsequent years. This period of slow income growth would mean that the typical household has around the same level of income in 2018-19 as in 2005-06.
The poor prospects for real income growth are due to a combination of weak real wage growth and reductions in state support because of fiscal consolidation. Typical pay among full-time men is expected to remain 4.7% below its 2008 level even by the end of the projection period in 2018.
Typical pay among full-time women, assuming that the gender pay gap continues gradually to narrow, would be expected to regain its pre-crisis level around 2017.
The downturn played out very differently across the UK and accentuated regional inequalities. London and the South East performed strongly while other nations and regions were hard hit. London represented 22% of the UK’s economy in 2008 yet accounted for only 1% of the decline in the UK’s GDP between 2008 and 2012. The South East, represented 14% of the economy in 2008 and didn’t account for any of the fall in the UK’s GDP. By contrast, Scotland representing 8% of the economy, accounted for 19% of the fall. Yorkshire and Humber, representing 7% of the economy, accounted for 16% of the fall.
The Resolution Foundation notes that its findings raise concerns not just for households but also for the wider sustainability of the economic recovery. The OBR’s current forecasts for GDP up to 2018 assume a consumption-led recovery. Because of weak income growth this requires households to steadily run down their savings ratio.
Gavin Kelly, chief executive of the Resolution Foundation, said: “The question of who will benefit from recovery – by how much and how soon – will be a key issue at the 2015 election and into the next Parliament. Our evidence suggests that the fall in living standards is bottoming out and should start to rise again next year. That’s the good news and given year after year of decline it will come as a relief. But as things stand the recovery for families looks like being painfully slow – by 2018 we expect the typical household to still be worse off than they were before the crisis.
“The hit to our living standards will take many years to repair. Our goal must be a widely shared recovery that sees the living standards of low to middle income Britain making up some of the lost ground of recent years as their income rise in line with overall economic growth. That still feels some way off.”
James Plunkett, director of policy at the Resolution Foundation, added: “Despite the strengthening recovery it looks like we’re set for several years of very weak income growth. It’s increasingly clear that the long downturn has permanently changed the course of living standards, with effects continuing to play out.
“As things stand, the recovery rests on consumer spending. And that spending rests on a diminishing savings rate, not income growth. With so many households already struggling with their debts – even with rates still low—a savings-led recovery is not a happy prospect.”
