WIREDGOV

IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to www.nuffieldfoundation.org. The Joseph Rowntree Foundation has also supported this research as part of its programme of research and innovative development projects, which it hopes will be of value to policymakers, practitioners and service users. All views are those of the authors.

Key findings

1. Real average (median) income is only around 5% higher now than it was in 2007–08. This is more than 10% lower than might have been expected before the recession, based upon the historical growth rate.

2. This masks substantial differences across age groups: average income among 22 to 30 year-olds is only now recovering its 2007–08 level, having been hit hard by the recession. By contrast, pensioners have seen sustained increases in their incomes, with their average income growing by nearly 15% over the same period.
3. The weakness in income growth has been seen across the income distribution. Growth in incomes has been slightly slower for high-income households (reducing income inequality), though they benefited most from falls in mortgage interest payments. But the slow growth in income among lower-income households has led to overall and child absolute poverty rates (on the official government definition) falling by just 2 and 3 percentage points respectively – in contrast to 13 and 15 percentage point falls over the previous decade.
4. Our projections suggest that, if the Office for Budget Responsibility (OBR) are correct about the outlook for employment, earnings and inflation, there will be no real growth in median income over the next two years, and only modest growth thereafter. This would leave incomes in 2021-22 more than 15% below where we might have expected before the financial crisis hit, based on historical growth rates – equivalent to over £5,000 per household per year on average.
5. We also project increases in inequality: both because forecast growth in average real earnings would benefit higher income households more than lower income ones, and because cuts in the real value of benefits will reduce incomes among poorer working age households. Real incomes are projected to fall among the poorest 20% of households over the next five years, with households with children being particularly affected.

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