Household incomes have fared very badly in the decade since the financial crisis. In 2015-16 (the latest data available), real median income in the UK was only 3.7% higher than it was at the start of the recession (2007-08) – usually incomes grow by around 2% each year. And new research from the Institute for Fiscal Studies suggests that if the government sticks to planned tax and benefit reforms, and the latest Office for Budget Responsibility’s (OBR) macroeconomic forecast is right, that slow growth is likely to continue – averaging just 0.8% per year between 2015-16 and 2021-22. In fact the OBR have indicated that their latest forecast was too optimistic, suggesting that income growth could in fact be slower still.
This meagre growth in incomes is unlikely to be shared evenly across the income distribution. In particular, planned benefit cuts mean that the poorest fifth of households are projected to see their incomes, after subtracting housing costs, stagnate or fall in real terms.
That means that for the population as a whole, absolute poverty – defined using a level fixed in real-terms (at about £200 per week for a lone parent with one child) – is projected to remain roughly unchanged. But this masks considerable differences in the fortunes of different groups: absolute poverty among pensioners and working-age non-parents is projected to fall, but absolute child poverty is projected to increase by four percentage points (ppts). About three-quarters of that increase – or 400,000 children – is accounted for by planned tax and benefit reforms, with the freeze to most working-age benefits and the limiting of means-tested benefits to the first two children being of particular importance.
The rise in the proportion of children living below the poverty line is likely to be greater in some parts of the UK than in others. If earnings and rents across the country grow in line with the OBR’s national forecast, absolute child poverty in Wales, the North East, the East Midlands, and Northern Ireland is projected to rise by around or above five ppts, while in London and the South East it is projected to rise by 1.5 to 2ppts.
These differences are partly explained by two important factors. First, those parts of the country where low-income working-age households get a larger share of their income from earnings, and a smaller share from benefits, are likely to do better. Regions and nations more dependent on benefits are naturally more exposed to benefit cuts, and gain less when earnings rise. For example, low-income households in the North East get around a third of their income from earnings, and those in Northern Ireland and Wales less than half, compared to 60% in the South East. Second, some parts of the country contain more poor families where there are at least three children – families that are potentially affected by the limiting of means-tested benefits to the first two children. For example, there are almost twice as many of these families in Northern Ireland and the West Midlands as there are in Scotland and the South West.
So the next few years are likely to be tough ones for living standards, with benefit cuts making things tougher still for poorer households – especially those with children. And regions and nations where poor households are more dependent upon benefits for their income are likely to bear the brunt of the increase in child poverty.
This blog is based on new research published by the Institute for Fiscal Studies. You can find the full report here