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Living Standards, Income Distribution & Growth

Posted By Duncan Weldon On 1 Dec 11 @ 4:24 pm In Economics | Comments Disabled

On the day of the Autumn Statement I drew attention to the OBR’s forecasts for real household disposable income and asked how these forecasts could be squared with their hope for decent consumption over the coming 4 years [1].

As I noted the OBR has revised down its forecasts for real wages (the squeeze is now expected to last into 2013) and revised down its forecasts for real household disposable income growth (RHDI). Average RHDI growth is only expected to be 0.5% this Parliament.

I also noted that the OBR is once again expecting RHDI growth to be lower than consumption growth and that consumption is due to provide 50% of all growth to 2015.

As I explained this forecast troubles me. The big thing the OBR got wrong in 2011 was its estimate of private household consumption – the squeeze in living standards meant that households cut back and hence domestic demand collapsed and GDP growth disappointed.

Yesterday we got some further analysis of the OBR numbers from the IFS. The results are extremely troubling.

The IFS note that [2]:

  • “we are living through the worst period for changes in measures of average living standards since consistent records began in the mid 50s/early 60s”
  • Between 2009/10 and 2012/13 median real household income is set to fall by 7.4%.
  • The distributional aspects of the squeeze are highly regressive – the bottom two deciles will see incomes fall by over 1.5% in 2012/13 due to changes in taxes and benefits whilst higher earners (in the top three deciles) will experience declines of around 0.5%.

Recent data from the ONS as shown that the squeeze on wages also varies across the income distribution. As the Guardian reported [3] last week:

The headline figures also masked sizeable falls in pay for some of the UK’s lowest-earning professions – and sizeable salary boosts for senior managers and directors.

Workers in “elementary occupations”, a classification including labourers, farm workers, postal workers and others, saw their typical pay fall 0.9% against its 2010 level, while professional pay rose 1% and managerial salaries rose 0.5%.

I worry that we can’t rely upon household spending to grow by more than household income and I especially worry if the squeeze on household income is greater at the bottom end.

The marginal propensity to consume [4] (i.e. the amount of each additional pound of income that a person will spend rather than save) is higher for low earners – in effect saving is a luxury that only the better off can afford.

Given that poorer people spend more of their income than better off people, a disproportionately large squeeze on incomes here will lead to disproportionately large impact on spending.

Without measures to address the squeeze in living standards I remain highly pessimistic about the prospects for decent consumption growth in the UK. Now in the medium term the UK does need to ‘rebalance ‘ away from an excessive reliance on household consumption, but the simple fact is that currently it contributes around 62% of GDP and weakness here is the primary reason for our stagnation.

What would of course be ideal is for decent growth in consumption to be matched by even higher growth in investment and exports but if consumption stagnates I find it very hard to see how the UK economy can grow much at all.


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#1 Comment By Frances Coppola On 1 Dec 11 @ 6:04 pm

Duncan, I’m so glad you’ve pointed out the fanciful nature of the OBR’s growth forecasts. I was beginning to think it was just me being pessimistic again, but I really couldn’t see how return to growth in 2013 was going to happen, let alone at 2 rising to 3 percent. Pie in the sky, frankly.

#2 Comment By gastro george On 2 Dec 11 @ 10:00 am

What is more farcical is their continued prediction that household debt will increase.

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#4 Pingback By Is the UK’s AAA rating now also under threat? Looks it | Liberal Conspiracy On 2 Dec 11 @ 3:31 pm

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Article printed from ToUChstone blog: A public policy blog from the TUC: http://touchstoneblog.org.uk

URL to article: http://touchstoneblog.org.uk/2011/12/living-standards-income-distribution-growth/

URLs in this post:

[1] I drew attention to the OBR’s forecasts for real household disposable income and asked how these forecasts could be squared with their hope for decent consumption over the coming 4 years: http://touchstoneblog.org.uk/2011/11/the-squeeze-in-living-standards-the-risks-to-the-growth-forecasts/

[2] The IFS note that: http://www.ifs.org.uk/budgets/as2011/tax_benefits_as11.pdf

[3] As the Guardian reported: http://www.guardian.co.uk/money/2011/nov/23/uk-household-earnings-fall

[4] marginal propensity to consume: http://en.wikipedia.org/wiki/Marginal_propensity_to_consume

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