With typical wages stagnant from 2003 and then falling in the downturn, low to middle income households have been increasingly reliant on state support But the growing role of tax credits went into reverse in 2011-12 when a series of reductions in in-work benefits began. This will see state support for low to middle income households steadily decline over the coming years.
Low to middle income households face a long and painful road to recovery. The average post-tax household income of the group is projected to fall to only £20,000 over the coming four years.
New polling for the Resolution Foundation reveals a cautious outlook among the electorate as to the prospects for the economy. The public is divided about how long it will take for growth to return.
More than a third of people (36%) do not believe that the economy will be growing again by 2015, expecting instead two more years without growth on top of the nearly five years to date. Nearly half (47%) are more optimistic that economic growth will have returned by 2015.
Four in ten people expect to be no better off in 2015 than they are today as the squeeze on wages, employment and government support continues to bite. However, almost the same number (42%) think that they will be better off in 2015 than they are today.
Polling conducted by IPSOS Mori from 1 February to 3 February 2013 with a telephone sample of 1005 people.
Based on current projections, the typical low to middle income household is expected to be no better off by 2017-18 than it was in 1997-98.
Aaron and Sophie who have three children can expect their household income to be £34,900 (in 2012-13 prices), £4,000 lower than it was in 2010-11. For them, a wage squeeze of £4,100 is slightly offset by the tax benefit system which contributes £100 more to their household income in 2015-16 than in 2010-11.
Ben and Mandie and their two children can expect a household income in 2015-16 of £40,000 (in 2012-13 prices), £6,200 lower than in 2010-11. Of this overall fall, they lose £3,600 in wages and £2,600 in state support.
Nikki, a single parent with two children, will see her family income fall by 13.1% between 2010-11 and 2015-16 to £30,200 (in 2012-13 prices). Of this, £2,000 will be lost in state support and £2,600 in wages.
Low to middle income households face a permanent hit to their life time earnings as a result of the prolonged downturn. To get back to the level of employment income they would have enjoyed in the absence of a downturn would require a rate of real terms earnings growth of 3.3% a year over the next decade. By historical standards, this seems highly improbable.
As we have seen, there are major challenges to raising wages or employment, given Britain’s large low wage labour market and the tailing off of growth in female employment over the last decade. The significance of unexpectedly high labour demand in the private sector over the last year for future employment growth remains uncertain.
To better understand the challenge ahead we can consider what would have to happen to growth in employment income to make up lost ground. For a start, what would it take over the coming decade for the low to middle income group to get back to where it was before the recession? In 2008 household income from employment among the group was £22,000. To get back to this level by 2022-23, household level earnings would have to grow by 1.1% a year in real terms. This should be achievable by historical standards. But given the likely decline in earnings over the next few years and ongoing macro-economic uncertainty, it is hardly guaranteed. And this would do nothing more than get low to middle income households back to where they were pre-recession. Furthermore, this does not take into account reductions in household income that can be expected as a result of declining support from tax credits and benefits.
For households in the group to get back to the level of employment income they would have enjoyed in the absence of a prolonged downturn – that is, to recover the lost ground – would require a rate of real terms earnings growth of 3.3% a year over the next decade. This would see household income from employment in the group reach £27,500. This rate of growth seems highly improbable given where the economy is today and by historical standards. Low to middle income households have not achieved this level of real terms earnings growth in more than two consecutive years since the late 1960s. Households in the group are likely to face a permanent hit to their life time earnings as a result of the prolonged downturn.
To take a more extreme example, if there are those that once assumed that incomes would keep growing at the rate they did from the 1980s until the early 2000s, they will need to adjust to even greater disappointment. If neither the post 2008 downturn, nor the preceding period of wage stagnation had occurred, and earnings had continued their uninterrupted rise, employment income would now be £31,500 – £11,000 higher than it is today. To make up the necessary ground over the next decade to achieve this hypothetical level of employment income would require an annual rate of earnings growth among low to middle income households that far outstrips anything that has been achieved in Britain over the last 40 years. It isn’t going to happen.
The road back to higher living standards for low to middle income households will be long, and some of the lost ground cannot be made up. The scale of the loss will depend in no small part on how quickly and stably the overall economy recovers. But as the years before the recession illustrate, low to middle income households were standing still even while the economy grew. Ensuring that those in the bottom half take their fair share of the benefits of a return to growth will be one of the key challenges for all political parties, and the country, in the decade ahead.