Andrew Hood IFS Post-Autumn Statement 2016 briefing 24 November 2016 The outlook for living standards
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Andrew Hood IFS Post-Autumn Statement 2016 briefing 24 November 2016
The outlook for living standards
The outlook for living standards © Institute for Fiscal Studies
What has been happening to living standards? Real median income (2007-08=100)
85
90
95
100
105
110
115
2007 2008 2009 2010 2011 2012 2013 2014
Med
ian
inco
me
(Ind
exed
to 1
00 in
200
7)
Source: Figure 2.6 of Living Standards, Poverty and Inequality: 2016
All 2%
The outlook for living standards © Institute for Fiscal Studies
85
90
95
100
105
110
115
2007 2008 2009 2010 2011 2012 2013 2014
Med
ian
inco
me
(Ind
exed
to 1
00 in
200
7)
-7%
Source: Figure 2.6 of Living Standards, Poverty and Inequality: 2016
22-30
What has been happening to living standards? Real median income (2007-08=100)
The outlook for living standards © Institute for Fiscal Studies
What has been happening to living standards? Real median income (2007-08=100)
85
90
95
100
105
110
115
2007 2008 2009 2010 2011 2012 2013 2014
Med
ian
inco
me
(Ind
exed
to 1
00 in
200
7)
-7%
0%
Source: Figure 2.6 of Living Standards, Poverty and Inequality: 2016
22-30
31-59
The outlook for living standards © Institute for Fiscal Studies
What has been happening to living standards? Real median income (2007-08=100)
85
90
95
100
105
110
115
2007 2008 2009 2010 2011 2012 2013 2014
Real
med
ian
inco
me
(Ind
exed
to 1
00 in
200
7)
-7%
0%
Source: Figure 2.6 of Living Standards, Poverty and Inequality: 2016
22-30
31-59
60+
+11%
Real-terms path of earnings, benefits and state pensions (2007-08=100)
90
92
94
96
98
100
102
104
106
108
110
© Institute for Fiscal Studies The outlook for living standards
Real-terms path of earnings, benefits and state pensions (2007-08=100)
90
92
94
96
98
100
102
104
106
108
110
Average earnings
© Institute for Fiscal Studies The outlook for living standards
Real-terms path of earnings, benefits and state pensions (2007-08=100)
90
92
94
96
98
100
102
104
106
108
110
JSA
Average earnings
© Institute for Fiscal Studies The outlook for living standards
Real-terms path of earnings, benefits and state pensions (2007-08=100)
90
92
94
96
98
100
102
104
106
108
110
Basic State Pension
JSA
Average earnings
© Institute for Fiscal Studies The outlook for living standards
Real-terms path of earnings, benefits and state pensions (2007-08=100)
90
92
94
96
98
100
102
104
106
108
110
Basic State Pension
NLW/NMW
JSA
Average earnings
© Institute for Fiscal Studies The outlook for living standards
Slower future growth means lower future living standards
OBR forecast national income (real GDP) to be £30bn (1.2%) lower in 2020-21 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
© Institute for Fiscal Studies The outlook for living standards
Real-terms path of earnings, benefits and state pensions (2007-08=100)
85
90
95
100
105
110
115
120
125
130
Basic State Pension
NLW/NMW
JSA
Average earnings
March 2016
November 2016
© Institute for Fiscal Studies The outlook for living standards
Real-terms path of earnings, benefits and state pensions (2007-08=100)
85
90
95
100
105
110
115
120
125
130
Basic State Pension
NLW/NMW
JSA
Average earnings
March 2016
November 2016
© Institute for Fiscal Studies The outlook for living standards
Real-terms path of earnings, benefits and state pensions (2007-08=100)
85
90
95
100
105
110
115
120
125
130
Basic State Pension
NLW/NMW
JSA
Average earnings
March 2016
November 2016
© Institute for Fiscal Studies The outlook for living standards
Real-terms path of earnings, benefits and state pensions (2007-08=100)
85
90
95
100
105
110
115
120
125
130
Basic State Pension
NLW/NMW
JSA
Average earnings
March 2016
November 2016
© Institute for Fiscal Studies The outlook for living standards
Real-terms path of earnings, benefits and state pensions (2007-08=100)
85
90
95
100
105
110
115
120
125
130
Basic State Pension
NLW/NMW
JSA
Average earnings
March 2016
November 2016
© Institute for Fiscal Studies The outlook for living standards
Real-terms path of earnings, benefits and state pensions (2007-08=100)
85
90
95
100
105
110
115
120
125
130
Basic State Pension
NLW/NMW
JSA
Average earnings
March 2016
November 2016
© Institute for Fiscal Studies The outlook for living standards
Real-terms path of earnings, benefits and state pensions (2007-08=100)
85
90
95
100
105
110
115
120
125
130
Basic State Pension
NLW/NMW
JSA
Average earnings
March 2016
November 2016
© Institute for Fiscal Studies The outlook for living standards
Real-terms path of earnings, benefits and state pensions (2007-08=100)
85
90
95
100
105
110
115
120
125
130
Basic State Pension
NLW/NMW
JSA
Average earnings
March 2016
November 2016
© Institute for Fiscal Studies The outlook for living standards
Real-terms path of earnings, benefits and state pensions (2007-08=100)
85
90
95
100
105
110
115
120
125
130
Basic State Pension
NLW/NMW
JSA
Average earnings
March 2016
November 2016
© Institute for Fiscal Studies The outlook for living standards
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...
© Institute for Fiscal Studies The outlook for living standards
© Institute for Fiscal Studies
-£450
-£400
-£350
-£300
-£250
-£200
-£150
-£100
-£50
£0 Poorest 2 3 4 5 6 7 8 9 Richest All
Ave
rage
exp
ecte
d in
com
e ch
ange
(£/y
ear)
March forecast
Higher inflation – the benefits freeze
• Policy expected to reduce working age benefits by 4% • Affects 11 million households by an average of £280 per year, saving government £3bn
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
-£450
-£400
-£350
-£300
-£250
-£200
-£150
-£100
-£50
£0 Poorest 2 3 4 5 6 7 8 9 Richest All
Ave
rage
exp
ecte
d in
com
e ch
ange
(£/y
ear)
Higher inflation – the benefits freeze
• Now expected to hit benefits by 6% • Affects the same 11 million households by an average of £390 per year, saving government £4.2bn
Assumes full take-up of means-tested benefits and tax credits and all changes fully in place
November forecast
The outlook for living standards
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
© Institute for Fiscal Studies The outlook for living standards
Impact on expected net income for a part-time lone parent in 2020-21
© Institute for Fiscal Studies 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.
-1600
-1400
-1200
-1000
-800
-600
-400
-200
0
200
400
Change between May 2015 and
March 2016
Change between March 2016 and November 2016
Chan
ge in
net
inco
me
in 2
020-
21 (2
016-
17 p
rice
s)
Tax and benefit policy National Living Wage Changes to forecasts Overall
Impact on expected net income for a part-time lone parent in 2020-21
© Institute for Fiscal Studies 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.
-1600
-1400
-1200
-1000
-800
-600
-400
-200
0
200
400
Change between May 2015 and
March 2016
Change between March 2016 and November 2016
Chan
ge in
net
inco
me
in 2
020-
21 (2
016-
17 p
rice
s)
Tax and benefit policy National Living Wage Changes to forecasts Overall
Impact on expected net income for a part-time lone parent in 2020-21
© Institute for Fiscal Studies 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.
-1600
-1400
-1200
-1000
-800
-600
-400
-200
0
200
400
Change between May 2015 and
March 2016
Change between March 2016 and November 2016
Chan
ge in
net
inco
me
in 2
020-
21 (2
016-
17 p
rice
s)
Tax and benefit policy National Living Wage Changes to forecasts Overall
Impact on expected net income for a part-time lone parent in 2020-21
© Institute for Fiscal Studies 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.
-1600
-1400
-1200
-1000
-800
-600
-400
-200
0
200
400
Change between May 2015 and
March 2016
Change between March 2016 and November 2016
Chan
ge in
net
inco
me
in 2
020-
21 (2
016-
17 p
rice
s)
Tax and benefit policy National Living Wage Changes to forecasts Overall
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
© Institute for Fiscal Studies The outlook for living standards
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