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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 .
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 :
Recent data from the ONS as shown that the squeeze on wages also varies across the income distribution. As the Guardian reported  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  (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.
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:
 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/
 The IFS note that: http://www.ifs.org.uk/budgets/as2011/tax_benefits_as11.pdf
 As the Guardian reported: http://www.guardian.co.uk/money/2011/nov/23/uk-household-earnings-fall
 marginal propensity to consume: http://en.wikipedia.org/wiki/Marginal_propensity_to_consume
 Are falling living standards inevitable?: http://touchstoneblog.org.uk/2011/09/are-falling-living-standards-inevitable
 The squeeze in living standards & the risks to the growth forecasts: http://touchstoneblog.org.uk/2011/11/the-squeeze-in-living-standards-the-risks-to-the-growth-forecasts
 More bad news on living standards: http://touchstoneblog.org.uk/2011/12/more-bad-news-on-living-standards
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