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Poorer households will see their incomes fall in the next few years, with inequality rising faster over this parliament than any time since Margaret Thatcher was in Downing Street, according to the Resolution Foundation’s annual audit of living standards.
The report, Living Standards 2017, says the UK’s recent mini-boom in living standards – in which typical household incomes (before housing costs) grew by over 2 per cent in both 2014/15 and 2015/16 – has ground to a halt as a result of rising inflation and a plateauing of employment in recent months.
Typical household income growth looks set to fall to 1.2 per cent this year (2016/17), it states. The Foundation’s forecast for living standards over the parliament, which combines the OBR’s latest projections for pay, prices and employment with the impact of government policy, shows that this slowdown is set to continue if there is no significant government intervention.
Stagnation in pay growth, which is forecast to bite towards the end of 2017 as inflation rises further, coupled with the rollout of more than £12bn of welfare cuts, means that typical household incomes after housing costs are set to grow by a meagre 0.5 per cent a year over the next four years, says the Foundation.
It says the reason the poor will suffer most is due to the impact of government policy on tax and benefits. While richer households were most affected by the pay squeeze in the wake of the financial crisis, the report shows that the richest fifth of households are set to enjoy small incomes gains of around four per cent over the next four years, while incomes across the entire poorest half of households are set to fall by an average of 3 per cent, with households with children particularly affected. It says a typical family with children is set to have a lower disposable income (after housing costs) in 2020-21 (£18,300 in current prices), than a typical family this year (£18,900).
The Foundation notes that the OBR forecasts are uncertain – and that lower inflation, stronger pay growth or further increases in the employment rate could significantly strengthen income growth over the parliament. Equally, with many forecasters predicting that inflation will rise well above the OBR’s expected peak of 2.6 per cent in 2018, the squeeze could be even tighter.
Torsten Bell, Director of the Resolution Foundation, said: “Britain has enjoyed a welcome mini-boom in living standards in recent years. But that boom is slowing rapidly as inflation rises, productivity flatlines and employment growth slows.
“The squeeze in the wake of the financial crisis tended to hit richer households the most. But this time around it’s low and middle income families with kids who are set to be worst affected.
“This could leave Britain with the worst of both worlds on living standards – the weak income growth of the last parliament and rising inequality from the time Margaret Thatcher was in Downing Street.
“The Prime Minister’s focus on supporting just managing families is absolutely right if we are to avoid the next few years being like the 1980s without the feel-good factor.”