Report predicts decade of squeeze for middle and low income families

Britain’s low to middle income families may have to wait a decade before their living standards return to pre-recession levels, according to a report by the Resolution Foundation.

The Squeezed Britain 2013 report says the prolonged downturn means that this large swathe of the population is likely to face “a permanent hit” to their expected levels of prosperity, as it will be hard for them to fully recover the ground that has been lost over recent years.

The report shows that if the typical earnings for families on low to middle incomes rise by an average of 1.1 per cent a year above inflation – which should be achievable by historical standards – then their earnings would recover to £22,000 a year by 2023, the equivalent of where they stood in 2008.

However, without the prolonged downturn since 2008 their typical earnings might now be expected to stand at £27,500; to reach that level over the next decade would require annual real earnings growth of 3.3 per cent which appears unattainable based on current projections and past experience. The Office for Budget Responsibility forecasts that average real earnings will continue to fall into 2014 at the same time as support from tax credits and benefits is due to decline.

New polling for the report conducted by Ipsos MORI shows that people are divided about whether growth will return soon. It shows that:

– More than a third of people (36 per cent) don’t believe the economy will be growing again by 2015 compared to 47 per cent who think it will be.

– Four in ten people (40 per cent) don’t expect to be better off in 2015 than they are today compared to 42 per cent who think they will be.

– Nearly seven out of ten people (68 per cent) saying they’re cutting back on spending – with women more likely to be cutting back than men (74 per cent vs. 62 per cent)

The report shows that the squeeze on the low to middle income group is not just a result of recent fiscal austerity but is much longer-term and deeper-seated. The struggle with stagnant wages, high levels of debt and a heavy reliance on rising tax-credits reaches back before the financial crisis, it says.  Squeezed Britain’s other findings include:

– More than four in 10 (43 per cent) of families on low to middle incomes say they would like to save £10 a month but are unable to. Two-thirds of households in the group have savings of less than a month’s net income

– Among all households with debts in the bottom half of the income distribution, 30 per cent are “debt-loaded”, that is, they spend more than a quarter of their total income on repayments – even at a time of ultra-low interest rates

– It would now take 22 years for a household on a low to middle income to save for an average deposit on a first-time buyer property – in a climate of stagnant incomes and restricted mortgages

– For the first time in recent history the majority of those on low to middle incomes under the age of 35 live in private rented property

– Low to middle income workers account for 70 per cent of the overall growth in self- employment since 2000 – 239,000 out of the total increase of 340,000

– Changes in the nature of inflation over the last decade mean that families on low to middle incomes have to pay a £280 cost of living “premium” as they spend a greater share of their budget on essentials (which have risen faster than other goods) compared to higher income households

– The richest 10th of working age households take 33 per cent of total income; while the richest 1 per cent take 10 per cent; and the entire poorest half receive just 18 per cent.

Matthew Whittaker, senior economist at the Resolution Foundation and author of the report, said: “There is a long road to travel just to get back to where living standards stood before the crisis – and the prospects of actually recovering the ground lost over recent years appear vanishingly thin. Every extra month of falling household incomes is harder to take than the last as household budgets get closer to the edge.

“As it has been more than four years since we’ve had steady growth, it is chilling to see that such a large section of the public don’t believe there will be economic growth before 2015, and no great surprise that so many people don’t expect to be better off in 2015 than they are now”.

Gavin Kelly, chief executive of the Resolution Foundation, said: “The next election will be about living standards yet little is known about what will be on offer. Given that reductions in tax credits and benefits appear likely after 2015 regardless of the election outcome, it is vital that all parties bring forward ideas for supporting wage growth and helping far more people to work.

“Without steady growth in earnings living standards will continue to stagnate. We can’t just return to the skewed growth of the past when too many on low and middle incomes failed to keep up with overall rises in prosperity”.

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