The outlook for living standards
Andrew Hood
IFS Post-Autumn Statement 2016 briefing
24 November 2016
What has been happening to living standards?
Real median income (2007-08=100)
115
Median income
(Indexed to 100 in 2007)
110
105
2%
All
100
95
90
85
2007
2008
2009
2010
2011
2012
2013
2014
Source: Figure 2.6 of Living Standards, Poverty and Inequality: 2016
The outlook for living standards
© Institute for Fiscal Studies
What has been happening to living standards?
Real median income (2007-08=100)
115
Median income
(Indexed to 100 in 2007)
110
105
100
95
22-30
-7%
90
85
2007
2008
2009
2010
2011
2012
2013
2014
Source: Figure 2.6 of Living Standards, Poverty and Inequality: 2016
The outlook for living standards
© Institute for Fiscal Studies
What has been happening to living standards?
Real median income (2007-08=100)
115
Median income
(Indexed to 100 in 2007)
110
105
100
0%
31-59
95
22-30
-7%
90
85
2007
2008
2009
2010
2011
2012
2013
2014
Source: Figure 2.6 of Living Standards, Poverty and Inequality: 2016
The outlook for living standards
© Institute for Fiscal Studies
What has been happening to living standards?
Real median income (2007-08=100)
115
+11%
Real median income
(Indexed to 100 in 2007)
110
60+
105
100
0%
31-59
95
22-30
-7%
90
85
2007
2008
2009
2010
2011
2012
2013
2014
Source: Figure 2.6 of Living Standards, Poverty and Inequality: 2016
The outlook for living standards
© Institute for Fiscal Studies
Real-terms path of earnings, benefits and
state pensions (2007-08=100)
110
108
106
104
102
100
98
96
94
92
90
The outlook for living standards
© Institute for Fiscal Studies
Real-terms path of earnings, benefits and
state pensions (2007-08=100)
110
108
106
104
102
100
98
96
94
92
Average earnings
90
The outlook for living standards
© Institute for Fiscal Studies
Real-terms path of earnings, benefits and
state pensions (2007-08=100)
110
108
106
104
102
JSA
100
98
96
94
92
Average earnings
90
The outlook for living standards
© Institute for Fiscal Studies
Real-terms path of earnings, benefits and
state pensions (2007-08=100)
110
108
Basic State Pension
106
104
102
JSA
100
98
96
94
92
Average earnings
90
The outlook for living standards
© Institute for Fiscal Studies
Real-terms path of earnings, benefits and
state pensions (2007-08=100)
110
108
Basic State Pension
106
104
102
JSA
100
98
NLW/NMW
96
94
92
Average earnings
90
The outlook for living standards
© Institute for Fiscal Studies
Slower future growth means lower future
living standards
OBR forecast national income (real GDP) to be £30bn (1.2%) lower in 202021 than it thought back in March
‒ Real GDP per household £1,000 lower in 2020-21 than expected
OBR forecast of effect of Brexit vote actually larger than total forecast
revision (around £50bn)
‒ Real GDP per household £1,250 lower in 2020-21 as a result
2 main ways the effects of this economic slowdown is expected to pass
through to real household incomes
1. Higher prices facing UK consumers
2. Lower cash earnings for UK workers
The outlook for living standards
© Institute for Fiscal Studies
Real-terms path of earnings, benefits and
state pensions (2007-08=100)
130
125
March 2016
November 2016
120
115
110
Basic State Pension
105
100
JSA
NLW/NMW
95
90
Average earnings
85
The outlook for living standards
© Institute for Fiscal Studies
Real-terms path of earnings, benefits and
state pensions (2007-08=100)
130
125
March 2016
November 2016
120
115
110
Basic State Pension
105
100
JSA
NLW/NMW
95
90
Average earnings
85
The outlook for living standards
© Institute for Fiscal Studies
Real-terms path of earnings, benefits and
state pensions (2007-08=100)
130
125
March 2016
November 2016
120
115
110
Basic State Pension
105
100
JSA
NLW/NMW
95
90
Average earnings
85
The outlook for living standards
© Institute for Fiscal Studies
Real-terms path of earnings, benefits and
state pensions (2007-08=100)
130
125
March 2016
November 2016
120
115
110
Basic State Pension
105
100
JSA
NLW/NMW
95
90
Average earnings
85
The outlook for living standards
© Institute for Fiscal Studies
Real-terms path of earnings, benefits and
state pensions (2007-08=100)
130
125
March 2016
November 2016
120
115
110
Basic State Pension
105
100
JSA
NLW/NMW
95
90
Average earnings
85
The outlook for living standards
© Institute for Fiscal Studies
Real-terms path of earnings, benefits and
state pensions (2007-08=100)
130
125
March 2016
November 2016
120
115
110
Basic State Pension
105
100
JSA
NLW/NMW
95
90
Average earnings
85
The outlook for living standards
© Institute for Fiscal Studies
Real-terms path of earnings, benefits and
state pensions (2007-08=100)
130
125
March 2016
November 2016
120
115
110
Basic State Pension
105
100
JSA
NLW/NMW
95
90
Average earnings
85
The outlook for living standards
© Institute for Fiscal Studies
Real-terms path of earnings, benefits and
state pensions (2007-08=100)
130
125
March 2016
November 2016
120
115
110
Basic State Pension
105
100
JSA
NLW/NMW
95
90
Average earnings
85
The outlook for living standards
© Institute for Fiscal Studies
Real-terms path of earnings, benefits and
state pensions (2007-08=100)
130
125
March 2016
November 2016
120
115
110
Basic State Pension
105
100
JSA
NLW/NMW
95
90
Average earnings
85
The outlook for living standards
© Institute for Fiscal Studies
Higher inflation – who pays the price?
The OBR now expects prices to be 1.4% higher in 2021 Q1 than was
expected back in March
‒ 13% fall in value of sterling adds 2.0% to CPI through higher import
prices
The effect of the devaluation on prices is likely to be similar for
different groups of households (see OBSERVATION)
‒ But some households’ incomes will rise automatically to offset
higher prices
‒ Normally that would include low-income working-age households
(in and out of work) on benefits...
The outlook for living standards
© Institute for Fiscal Studies
Higher inflation – the benefits freeze
Poorest
2
3
4
5
6
7
8
9
Richest
All
£0
Average expected income change (£/year)
-£50
-£100
March forecast
-£150
-£200
• Policy expected to reduce working age benefits by 4%
-£250
• Affects 11 million households by an average of £280
per year, saving government £3bn
-£300
-£350
-£400
-£450
Assumes full take-up of means-tested benefits and tax credits and all changes fully in place
The outlook for living standards
© Institute for Fiscal Studies
Higher inflation – the benefits freeze
Poorest
2
3
4
5
6
7
8
9
Richest
All
£0
Average expected income change (£/year)
-£50
-£100
November forecast
-£150
-£200
• Now expected to hit benefits by 6%
-£250
• Affects the same 11 million households by an average
of £390 per year, saving government £4.2bn
-£300
-£350
-£400
-£450
Assumes full take-up of means-tested benefits and tax credits and all changes fully in place
The outlook for living standards
© Institute for Fiscal Studies
Lower earnings
The OBR now expects average earnings to be 2.4% lower in cash
terms in 2021 Q1 than was expected back in March
‒ Mainly explained by lower productivity, as investment falls in light of
post-Brexit uncertainty
‒ Combined with higher inflation, this is a 3.7% decline in forecast
average real earnings
2020 National Living Wage expected to be 27p an hour lower in real
terms than was expected back in March
‒ £8.05 in current prices, compared to £8.32 expected in March
‒ But still much higher than the £7.09 expected for the National
Minimum Wage
The outlook for living standards
© Institute for Fiscal Studies
Impact on expected net income for a part-time
lone parent in 2020-21
Change in net income in 2020-21 (2016-17 prices)
Tax and benefit policy
Change between
May 2015 and
March 2016
National Living Wage
Changes to forecasts
Overall
Change between
March 2016 and
November 2016
400
200
0
-200
-400
-600
-800
-1000
-1200
-1400
-1600
Note: figure shows change in expected net income for lone parent with 2 children, working 16 hours per week at the National Living
Wage in 2020-21, with a weekly rent of £130.
© Institute for Fiscal Studies
Impact on expected net income for a part-time
lone parent in 2020-21
Change in net income in 2020-21 (2016-17 prices)
Tax and benefit policy
Change between
May 2015 and
March 2016
National Living Wage
Changes to forecasts
Overall
Change between
March 2016 and
November 2016
400
200
0
-200
-400
-600
-800
-1000
-1200
-1400
-1600
Note: figure shows change in expected net income for lone parent with 2 children, working 16 hours per week at the National Living
Wage in 2020-21, with a weekly rent of £130.
© Institute for Fiscal Studies
Impact on expected net income for a part-time
lone parent in 2020-21
Change in net income in 2020-21 (2016-17 prices)
Tax and benefit policy
Change between
May 2015 and
March 2016
National Living Wage
Changes to forecasts
Overall
Change between
March 2016 and
November 2016
400
200
0
-200
-400
-600
-800
-1000
-1200
-1400
-1600
Note: figure shows change in expected net income for lone parent with 2 children, working 16 hours per week at the National Living
Wage in 2020-21, with a weekly rent of £130.
© Institute for Fiscal Studies
Impact on expected net income for a part-time
lone parent in 2020-21
Change in net income in 2020-21 (2016-17 prices)
Tax and benefit policy
Change between
May 2015 and
March 2016
National Living Wage
Changes to forecasts
Overall
Change between
March 2016 and
November 2016
400
200
0
-200
-400
-600
-800
-1000
-1200
-1400
-1600
Note: figure shows change in expected net income for lone parent with 2 children, working 16 hours per week at the National Living
Wage in 2020-21, with a weekly rent of £130.
© Institute for Fiscal Studies
Conclusion
Living standards over the next few years to be hit by combination of higher prices
and lower earnings
‒ OBR expects average real earnings to be 3.7% lower in 2021 than they thought
back in March (and still to be below pre-crisis level)
Pensioners will feel earnings squeeze less, and more protected than working-age
households when prices rise
‒ Particularly given working-age benefits freeze
‒ But real increase in state pension lower than previously expected
Next few years will see benefits cuts for low-income working households on top of
lower earnings and higher prices
‒ For some low-income working families these will actually matter more than the
weaker macro outlook
The outlook for living standards
© Institute for Fiscal Studies