IFS forecasts stagnating incomes and rising inequality

2 Mar 17

Household income in the UK will continue to stagnate over the next two years, while child poverty and inequality is set to grow, the Institute for Fiscal Studies has predicted.

This is the conclusion of an analysis on living standards published today by the think-tank, funded by the Joseph Rowntree Foundation, and based on projections by the Office for Budget Responsibility.

It found that average household income will be static for the next two years and will have risen by only 4% in five years’ time. The study said the “long-shadow” cast by the financial crisis has left projected income for 2021-22 around 18% lower than if pre-2008 growth trends had continued. This is the equivalent to £5,000 per household every year.

As well as OBR predictions, the study uses household income data from the Department for Work and Pensions, and also takes into future benefits and tax policy changes announced by the government.

This continuing slowdown in income growth is “unprecedented” in the past 60 years, the IFS said. Moreover, even if OBR forecasting turns out to be overly pessimistic, and real earnings grow by 1 percentage point more rapidly then predicted, average income will grow by less than 7% over the next five years.

Some sections of society will fare better than others. Pensioners’ incomes are expected to grow twice as quickly as the rest of the population. By 2021-22, average pensioner income is likely to be 24% higher than it was in 2007-8, and 8% higher than for non-pensioners. This spells a dramatic reversal in the fortunes for pensioners over the past decade, since in 2007-08 pensioner income was 10% lower than the rest of the population.

A recent study by the Resolution Foundation found that pensioners are now £20 a week better off than people of working age. This partly explained by greater home ownership among this group, and the fact a wave of relatively wealthy people have recently reached retirement age.

Combined with planned cuts to benefits in line with OBR expectations, flat income growth will cause inequality to rise, according to the report. This overturns a trend seen since the financial crisis, whereby wealth inequality has waned as a consequence of slow wage growth and strong employment.

As such, the poorest 15% of the population are likely to have lower incomes in the next five years, as a consequence of benefit cuts. The government’s planned four-year benefits freeze will cut the value of most working-age benefits by 6% – meanwhile Universal Credit will be on average, “less generous than the benefits it is replacing”.

The worst affected group will be households with children, with poverty levels rising from 27.5% in 2014-15 to around 30% in 2021-22, the IFS predicts.  

Andrew Hood, report co-author and senior research economist at the IFS, said: “Weak earnings growth combined with planned benefit cuts means that the absolute poverty rate among children is projected to be roughly the same in 2021–22 as it was back in 2007–08.”

“Tax and benefit changes planned for this parliament explain all of the projected increase in absolute child poverty between 2014–15 and 2021–22.”

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