UK households facing slow growth in living standards, new report suggests

The independent think-tank expects most of the growth in living standards over the next 5 years is happening right now – in the current year.

And it warns that poorer households will see a worse outcome, which could push 400,000 more children below the poverty line by 2030.

We’ve heard a lot in recent days about the pressures on the public finances. This week, the Prime Minister promised a “painful budget” at the end of October – which most people interpret as code for significant tax increases.

This report – from the Resolution Foundation is a companion piece to that – setting out the prospects for our own budgets rather than the government’s. Unfortunately, it believes those prospects are also pretty poor.

According to this analysis, we are passing through a sweet spot for living standards right now – though it may not feel like that to a lot of people.

The reason is that the rate of inflation has been slowly coming down while pay is still rising quite strongly.

In the year to June, average weekly earnings rose by 5.4%.  But over the same period, inflation went up by 2%.

As a result, in real terms we were better off.  That’s not something that many of us have been feeling for several years.

Enjoy it while it lasts

But the Resolution Foundation thinks this isn’t going to last.

It reckons that median incomes (so not the average but those bang in the middle of the income distribution) will grow 3% in 2024/25.

But it forecasts the annual rate for the years through to 2029-30 will average just 0.4%.

It says there’s a raft of reasons why things slow down: rising unemployment, higher taxes (because personal allowances are still frozen), and higher rents and mortgage payments.

But what really holds income back is the low rate of productivity growth. This has been much lower than it was in the 1990s – and neither the Bank of England nor the Office for Budget Responsibility see that changing in the next few years.

The chart below shows median income growth since the mid-90s – with the Resolution Foundation forecasts on the right.

(Source: Resolution Foundation)

What’s striking in this chart is to compare the growth in median living standards projected over the next 5 years with the heady days of the mid-90s – shown on the left side of chart.

When Oasis ruled the charts and Tony Blair had just been elected – people were getting better off in real terms year after year.

Compare it to the columns on the right side of the chart. If these forecasts are anything like correct, the current Labour government doesn’t have much to offer voters.

People on lower incomes

The problem is worse for people on lower incomes because of 2 policies set in train by the Conservative government that will progressively squeeze incomes.

The Foundation thinks this means that the number of children living in relative poverty is set to rise by 400,000 (to reach 4.6 million by the end of the decade).

The Foundation blames this on two policies: the 2 child limit on benefits and the freeze in the Local Housing Allowance.

Many Labour MPs would like to see the 2 child limit removed, though Rachel Reeves will have to find £2.5 billion if she wants to do that next year.

The Resolution Foundation has used the current forecasts on economic growth and productivity produced by the Bank of England and the Office for Budget Responsibility – so none of this reflects Labour’s new policies.

It’s promising a boost to house-building, more investment in green jobs and a raft of extra rights at work – all of which, it thinks, will help growth and improve living standards.

But if today’s take from the Resolution Foundation is anywhere near the truth, you can understand why Labour must be desperate that its reform programme breaks the UK’s long cycle of stagnation.