From the TUC

Squeezed Households: 5 Lessons

18 Mar 2013, by Guest in Economics

New figures from the ONS today demonstrate the extent of the squeeze on middle income households.

The below chart really is quite telling:

household income ons 1977 2011

This picture is a familiar one – a trend noted many times before by the TUC and the Resolution Foundation amongst others.

The ONS today note that:

Since the start of the economic downturn, original income for this middle fifth has fallen by 8.8%, once inflation is taken into account, driven largely by a reduction in income from earnings. However, an increase in the amount of income received through cash benefits and a fall in the proportion of income paid in taxes has meant that disposable income for this group has fallen by only 3.8% in real terms.

Five things are worth noting from this release:

This problem pre-dates the 2008 crash. As is very clear from the chart above, median household incomes begin to stagnate in the mid 2000s.

Things have got worse since. The data release today only runs until fiscal year 2010/11. The bulk of the cuts in tax credits and other social security benefits enacted by the Coalition are not included in this data. Nor are the real wage falls of 2011/12 or 2012/13.

The coming Budget won’t do much for living standards. It seems likely that the coming Budget will be billed as a ‘living standards budget’ with the centre-piece being a further rise in the personal allowance. However as TUC research published today demonstrates families on all income levels are losing more from the rise in VAT than they gain from the increase in the personal allowance. A real budget focussed on living standard as would include a cut in VAT.

Predistribution matters. In the period 2007/08 to 2010/11 the biggest factor driving down household living standards was the fall in real wages. Rising living standards requires changes in the tax and benefit system but also stronger wage growth.

This is bad for the wider economy. For reasons I’ve outlined before, if we want a stronger, more sustainable recovery it has to be underpinned by rising household incomes.