Living standards will not improve before next election, especially for low-income families, says IFS

February 11, 2014

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By Lucy Palmer-Richeson

11th February 2014

Living standards in the UK will not reach pre-crash level in time for the next election according to economists, despite the UK’s economic recovery.

The Institute for Fiscal Studies (IFS) announced today that whilst the drop in household incomes has stabilized, living standards are still much lower than they were before the recession hit in 2008.

Whilst this affects both low and high income households, it is predicted that it is the low income families that will feel the squeeze the most in the coming years, with the possibility of further cuts to benefits and tax credits.

It is probable the findings will add fuel to the contentious issue of falling living standards and whether the UK’s economic recovery will benefit all groups of society equally, a political debate that has been on the agenda for months now. The IFS suggested that, until now, this debate did not have enough up-to-date information. The IFS took into account more recent effects of changes to tax rises, incomes and inflation.

According to the analysis, “there is little reason to expect a strong recovery in living standards over the next few years”. The Office for Budget Responsibility has said that real earnings are not expected to return to their 2009-10 levels until 2018-19.

The findings showed that the richest 10% of the population have seen their incomes hit the hardest, with a fall of 9% since the recession. The poorest 10% have seen their incomes fall by 2.4% over the same period.

This showed that earnings had risen more slowly than prices, while benefit rates had kept up with the cost of living.

However, the IFS reported that those with relatively high incomes had benefitted from cheaper mortgage rates.

According to the report, ‘Average living standards have fallen dramatically since the recession, as income growth has failed to keep pace with the rate of inflation. This fall in average incomes has largely been driven by declines in real earnings.

‘Looking forward, however, the combination of recovering real earnings and further cuts to benefits and tax credits is likely to mean that nominal income growth will be lower towards the bottom of the distribution.

‘Unless differences in inflation are reversed, this could mean that low-income households will see the largest falls in living standards over the period of recession and fiscal consolidation as a whole.’