IFS points to a possibly rocky road ahead?

The institute for Fiscal Studies (IFS) has announced research showing that the average household income has reached pre-crisis levels, although it’s still 2% below the 2009-2010 peak. The IFS
also found that the average incomes for full time employees are still far below 2007-2008 levels once adjusted for inflation.

As it stands, on average only those in the over 60’s age bracket have higher levels of income in 2015 than they did in 2007-2008 and the standard of living has risen far more slowly than in any other recession on record. The IFS has stated this slow growth was due to weak earning for those in work, with added strain from the government’s tax increases and benefit cuts to reduce the deficit.

The director of IFS, Paul Johnson, explained to Radio 4, “It’s astonishing actually that seven years later incomes are still no higher than they were pre-recession, and indeed for working-age households they’re still a bit below where they were pre-recession.”

The IFS is walking a tight rope as it attempts not to land the blame firmly at the feet of the coalition government (or the preceding Labour one), instead stating that the prime suspect is the UK’s continuing and seemingly inexplicable low productivity performance as a result of weak worker output increases. This in turn, results in a situation where any real wage increase becomes financially impossible for employers.

The IFS has also found itself caught between a Labour rock and a Tory hard place, having been forced to tackle the question, “has income inequality worsened since the 2008 crash?” As it stands, the facts presented do not show the government in a favourable light; inflation between 2007 and 2010 was especially pernicious to the poor due to almost vertical rises in food and energy prices, resulting in low earners (most of whom were in full time employment) having to spend a disproportionately large part of their incomes on cost of living expenses.

IFS’ conclusions are based upon an analysis of both the Office for National Statistics (ONS) Labour Force Survey and the government’s own Office for Budget Responsibility. Other findings of the analysis are:

  • Median household income grew by just 1.8% between 2011-12 and 2014-15
  • Median income for those aged between 22 to 30 is 7.6% lower in 2014-15 than in 2007-08, while for those aged 31 to 59 it is 2.5% lower, but for those over 60 it is 1.8% higher.

As a result of this analysis, the IFS has issued a warning that the average person now believes their income prospects have been significantly and permanently reduced by the recession and that food and fuel consumption is drastically lower than at the same point in other recessions. Worryingly, this indicates families are actively choosing to buy less food, and have greatly reduced recreational travel too.

As Robert Joyce, an IFS Senior Research Economist, states: “The key reason living standards have recovered so slowly has been weak earnings growth. In the long run, policies that boost productivity, and so increase real earnings, are likely to have a bigger impact on living standards than changes in tax and benefit rates.

Perhaps now really is the time to end austerity – not just because of idealism, but because it makes sound economic sense?