Real median household incomes are projected to grow by a healthy
3 per cent this year. But on current economic forecasts and
policy assumptions, this recovery is set to peter out, with
incomes forecast to grow by just 2 per cent in total over the
next five years, highlighting why the Government needs to beat
the forecasts by kickstarting growth, says Resolution Foundation
research published today (Thursday).
As the main parties argue over the real state of the new
Government's economic inheritance, the Living Standards
Outlook 2024 focuses on the inheritance that matters most to
families – what could happen to incomes and poverty over the
course of the Parliament.
To do this, it uses the latest forecasts from the Bank of England
and Office for Budget Responsibility (OBR) on wages, inflation,
unemployment, and housing costs, as well as tax and benefit
policies inherited from the last Government that are due to come
into effect. The OBR forecast from March predates the new
Government, while the Bank's forecast from August makes no
account of what the new Government might do.
The report notes that after a bumper year in 2024-25, during
which incomes are on track to grow by 3 per cent off the back of
strong wage growth and falling inflation, annual median income
growth for non-pensioner households between 2024-25 and 2029-30
is forecast to fall to just 0.4 per cent.
This would leave annual median income growth over the whole
Parliament at just 0.8 per cent – or £1,400 per household – less
than half the 2.1 per cent annual income enjoyed during the last
Labour Government. The main reasons for this are forecasts for
weak pay growth after next year, rising unemployment, and housing
costs outpacing wage rises.
The report adds that while the living standards outlook for
middle-income households is weak, it is even worse for poorer
households, who are set to gain less from wage rises this year,
and will lose more should benefit cuts currently assumed in the
fiscal forecasts be rolled out over the Parliament.
The combination of current forecasts and inherited policies
result in a projected income fall for poor working-age households
(at the tenth percentile of the income distribution) of around
£600 a year over the Parliament (between 2023-24 and 2029-30).
The number of children living in relative poverty is projected to
rise by 400,000 to reach 4.6 million by the end of the decade.
This projected rise in child poverty is driven by the continued
rollout of the two-child limit, the freezing of the Local Housing
Allowance (LHA), and the value of benefits continuing to fall
relative to wages.
The Foundation says that these forecasts are bleak, but are not
set in stone, and the report sets out three plausible scenarios
in which the outlook for incomes and poverty can be greatly
improved.
First, real annual wage growth being one percentage point higher
from 2025-26 onwards would boost typical income growth for
non-pensioner households from 5 per cent over the Parliament to a
respectable 8 per cent. The transformative impact of higher
earnings growth highlights the need to deliver stronger
productivity-based economic growth, says the Foundation.
Second, removing the two-child limit, benefit cap and LHA freeze
from 2025 onwards, at a total cost of around £3.5 billion (in
2025-26, but rising over the Parliament), would lift 600,000
children out of poverty overnight. The Foundation cautions
however that while these policy reversals would be hugely
welcome, after the initial drop relative poverty rates would be
on track to rise again.
To prevent this, the report sets out a third scenario, in which
working-age benefits are uprated annually by wages rather than
prices from 2025. This additional policy, costing around £9
billion a year by the end of the Parliament, would stabilise
child poverty rates at a lower level than in the previous
Parliament (if combined with the policy changes outlined in
scenario two).
Alex Clegg, Economist at the Resolution Foundation,
said:
“Britain is currently experiencing a mini living standards
recovery as inflation falls but wage rises remain high. But this
isn't set to last, with the majority of income growth projected
over the Parliament coming in this year alone. After that, wage
rises are forecast to weaken and be overtaken by rent and
mortgage cost increases.
“And while the outlook for middle-income households is weak, it's
even worse for poor households, with 400,000 children at risk of
falling below the poverty line.
“This troubling outlook highlights the need for the new
Government to beat the forecasts that they have inherited. A new
economic strategy that delivers stronger growth, coupled with the
reversal of damaging benefit policies set by the previous
Government, could still make this a Parliament of fast-rising
living standards and falling poverty.”
