The recession that started more than three years ago has taken some time to impact on household income, but the pain has only been postponed and not avoided
The UK recently experienced its worst recession for over 60 years, during which GDP fell by over 6% between the first quarter of 2008 and the third quarter of 2009. We would naturally expect this fall in national income to have stark consequences for UK households’ living standards. Recent research from the IFS has looked in detail at changes in the distribution of net income in the UK between 2007–08 (the financial year in which the recession began) and 2010–11 (the last complete financial year), as part of a cross-national study which places the UK experience in an international context.
Given the severity of the recession, its immediate impacts on living standards are remarkably hard to detect. Median net household income in the UK continued to grow slightly in real terms between 2007–08 and 2009–10 (the latest year for which household income data are available), at a similar pace to that in the immediate pre-recession years. This was a phenomenon common to many other developed countries, including Sweden, the US, and even Ireland.
A key reason for the initial stability of the income distribution after the start of the recession was the stabilising role of the tax and benefit system. Again, this is a feature common to other countries, and marks an important difference compared to the last time the UK experienced a recession of similar severity, when the welfare state was (at most) in its infancy. Welfare systems naturally soften the blow for those who suffer falls in private income; but in the UK case, there were also significant above-inflation increases in the rates of many benefits during the recession (particularly in April 2009).
Relatively muted reductions in employment (compared to falls in GDP) – due largely to a reduction in hours worked among those employed – and continued real growth in earnings among those employed also helped to moderate the immediate impacts of the recession on UK incomes. But employment falls were more acute among particular groups, namely men, the less educated, and (as in many other countries) the young.
But these benign initial trends in household incomes after the recession hit did not last. The most recent household income data available are for 2009–10, but we estimate that average incomes fell substantially in 2010–11, the financial year immediately after the recession ended: median net household income is expected to have fallen by about 3.5% in real terms, which if correct would be the largest single-year drop since 1981, and sufficient to return it to its 2003–04 level. This expectation is due to a combination of substantial real falls in earnings, state benefits and tax credit amounts in 2010–11, and lower employment.
Looking forwards, the outlook for living standards is bleak. The Office for Budget Responsibility forecasts continued falls in average real earnings and weak employment trends; and the Government has announced a huge planned fiscal consolidation in an attempt to repair the public finances that deteriorated so rapidly during the recession, with tax rises and cuts to welfare spending and public services totalling 6% of national income.
The precise impacts of public service cuts on particular households are notoriously difficult to quantify, but cuts of the magnitude planned will surely reduce living standards. The recession began more than three years ago, but its most severe impacts on UK living standards are only just beginning, and it is set to cast a very long shadow.
Robert Joyce is a research economist at the Institute for Fiscal Studies. This research forms the UK-based chapter of a cross-national report, The Great Recession and the Distribution of Household Income, funded by Italian research institute the Fondazione Rodolfo Debenedetti. The chapter was written by Robert Joyce and Luke Sibieta of the IFS
