Incomes ‘at pre-recession levels’

Published: Wednesday 4th March 2015 by The News Editor

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Average household incomes are back to the levels they were at before the financial downturn struck, the Institute for Fiscal Studies (IFS) has found.

But the recovery in living standards has been much slower than after previous recessions and changes to spending patterns suggest that people think their income prospects have taken a permanent hit, it warned.

Younger people, people on higher incomes, and people without children tend to have come off worse than those in other groups in recent years, according to the findings.

The IFS said that the slow recovery in incomes has been a “remarkable feature” of the recent downturn and this comes on top of slow income growth in the years prior to the recession. The net result is that middle incomes in 2014/15 are less than 3% higher than they were a decade earlier.

The new IFS projections suggest that m edian or middle household incomes in 2014/15 have reached the same levels as they were in 2007, although they are still more than 2% below their 2009/10 peak.

Across the UK, the typical middle income household without children had an income of £461 a week in 2014/15, which is £5 a week more than a year earlier and around the same level as in 2007. But in 2009/10, middle income households had an average income of £473 a week in 2014/15 prices.

The IFS’s findings were contained in a new election briefing note on living standards, funded by the Nuffield Foundation.

It said the coalition Government took office just as household incomes were starting their “inevitable” decline and it is “almost certain” that incomes would have fallen significantly under any government.

When compared with previous economic recoveries, the current recovery in living standards has been slow, according to the findings.

Between 2011/12 and 2014/15, middle incomes grew by 1.8%. In the first three years of recovery in the early 1980s, middle incomes grew by 9.2% and during the same recovery period in the 1990s – this growth was at 5.1%.

Weak earnings growth has been a key reason for the slow recovery in living standards, while tax increases and benefit cuts, which have been put into place as part of the deficit reduction plan, have also squeezed incomes, the report said.

The report also highlighted evidence in spending patterns that households consider the downturn to have permanently affected their income prospects.

Consumption per person of “non durable” items such as food and fuel was 3.8% lower in autumn 2014 than it was in early 2008. But at the same point after the 1980s and 1990s recessions, consumption of non durables was 14.4% and 6.4% above pre-recession levels respectively.

The report said : ” This might reflect households’ perceptions that their income prospects have been permanently damaged by the crisis and that a significant cut to their spending is therefore required.”

The report also looked at how different groups are faring as the recovery takes hold.

Andrew Hood, an author of the report, said: “The young have done much worse than the old, those on higher incomes somewhat worse than those on lower incomes, and those with children better than those without.”

The IFS said that large falls in real earnings have had a bigger effect on wealthier households, while poorer households have been hit harder by the rising cost of living. Lower income households tend to dedicate a higher share of their income towards food and energy costs than those who are more well off.

And while ultra low mortgage rates, as the Bank of England base rate has remained at its historic 0.5% low, have helped to ease the pressure on home owners, poorer households have been less likely to benefit as they are less likely to own their property, the report said.

There are also differences between households with and those without children. Median average income among households with children is estimated to be 0.4% higher in 2014/15 than in 2007/08, while median income among households without children is still 3.8% lower than before the financial crisis.

The difference is mainly said to be due to earnings from the labour market making up a smaller proportion of household income for households with children than for those without.

Looking at different age groups, the report found that while the median average income of people aged 60 and over is projected to be 1.8% higher in 2014/15 than in 2007/08, the median income of those aged between 22 and 30 years old, who have been particularly hit by falls in real earnings and the employment situation, is estimated to be nearly 8% lower than in 2007/08.

While pensioners have been hit particularly badly by the rising cost of energy and food in recent years, they have been helped by measures such as the “triple locking” of the state pension, which guarantees that the pension is uprated by a certain amount, according to the findings.

Looking ahead to the longer term , the ageing population will continue to make it harder to balance supporting pensioners with other priorities, the report said.

Another “crucial” issue will be the extent to which the difficult early labour market experiences of young adults affect their ability to work and earn good wages in future, it added.

Robert Joyce, another author of the report, said: “The key reason living standards have recovered so slowly has been weak earnings growth.

“In the long run, policies that boost productivity, and so increase real earnings, are likely to have a bigger impact on living standards than changes n tax and benefit rates.”

A Treasury spokeswoman said the IFS analysis “shows that average household incomes are now restored to around their pre-crisis levels and are expected to grow well above inflation this year.

“At this rate of progress, real terms median household incomes would be higher in 2015/16 than they were in 2010/11.”

Published: Wednesday 4th March 2015 by The News Editor

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