IFS: higher inflation leads to household income stagnation

14 Jun 19

Real income growth has ground to a halt after five years of recovery, with lowest income households hardest hit because of cuts in benefits and tax credits.

According to new analysis from the Institute for Fiscal Studies, 2017-18 was only the fourth year in the last 30 in which household incomes have failed to grow.

The institute attributed the phenomenon to a decline in real earnings as result of the higher inflation, which followed the depreciation of sterling in the light of the Brexit vote.

Real cuts to working age tax credits and benefits, which were also made more severe by the rise in inflation, were also to blame, the IFS said.   

That meant the impact of weak income growth may have been more strongly felt in poorer households.

While on average the bottom fifth of the income distribution saw its income decline by 1.6% in 2017-18, the top fifth saw it grow by 0.8%. The middle fifth saw no movement.

“Although overall inequality did not change much, there is some evidence that net income growth was lower for low-income than for high-income households, as a result of falling income from benefits and tax credits,” it said.

“Of the factors affecting incomes in the coming years that are relatively clear – those relating to planned policy on minimum wages and benefits – it seems likely that the net impact will be to push up inequality in household incomes.

“Much of the rest of what happens will depend on the wider evolution of the economy, and what this means for jobs and wages – factors which have rarely been more uncertain.”

The institute said that most working-age benefits remained frozen in cash terms in 2018–19, a policy that has continued into 2019–20.

“There are still substantial cuts planned for working-age benefits in the next years, especially because of the move from the ‘legacy’ benefits system to the overall less generous (in entitlements) universal credit system, which is now expected only to be fully rolled out by 2023–24,” it said.

“In combination with cuts to tax credits, this means that benefit entitlements are likely to shrink in real terms, pushing down the incomes of poorer households.”

Median income was now just 5.6% above its level a decade earlier – “very slow growth” by historical standards, the institute said.

The findings form part of the institute’s report on living standards, poverty and inequality in the UK, which will be published next week.  

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