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Don’t believe the hype: average income has not returned to pre-crisis levels

Don’t believe the hype: average income has not returned to pre-crisis levels

“Average income back to pre-crisis levels says IFS” reads the BBC headline. And George Osborne says “Incomes are back to where they were before the recession” That would be welcome news indeed. Shame it’s not true. With misleading headlines like that, anyone would think there was an election on.

So, to the facts. In an interesting Election Briefing, the Institute for Fiscal Studies today reports on recent trends in Living Standards. Contrary to the BBC report, and the Chancellor’s words, the IFS report shows that median incomes are lower than before the recession. Median income measured at 2014-15 prices is £461 in 2014/15. The recession began in the second quarter of 2008 – incomes were higher at £469 in 2008-09, and indeed higher in 2007-08 at £463. Median incomes are even lower when compared to 2010 when the Coalition came to power, when median incomes were £473. It should be noted that in the first years of the recession, the last Labour Government introduced fiscal stimulus measures which increased real incomes.

So let’s be quite clear:

  • 2007-08 - £463
  • 2008-9 - £469
  • 2014-15 - £461

(Trade unionists involved in wage bargaining will be familiar with employers using the most convenient measure of inflation. They will also know that RPI has been scorned in recent times in favour of CPI. The figures in the IFS report are based on an updated version of RPI – the RPIJ index. While the RPIJ is preferred as a measure of income by many, it shows a considerably lower fall in real incomes in recent years. If CPI is used, real median income in 2014/15 is projected to be 3% below 2007/08 levels whereas RPIJ as shown  above  shows a 0.4% fall.)

The real impact of falling living standards is perhaps best demonstrated by the figures for “non-durable” spending. Delaying the purchase of big items is one thing, but cutting back on the food and fuel which constitutes “non-durable spending” impacts very directly on domestic life. Twenty-six quarters after the recession began, household non-durable expenditure is still 3.8% below its pre-recession level.  The IFS also notes that this is a much slower “recovery” than in previous recessions.

These declines in living standards are even more serious for younger households when taking into account the differential inflation experienced by different age-groups. While the over 60s have seen a slight increase in incomes since before the crisis, the IFS says that the real median income of those aged 31-59 is projected to be 2.5% below its pre-crisis level in 2014-15. And for young adults, aged 22-30, real median income is projected to be 7.6% lower. These are not small differences – they explain the repeated opinion poll findings, which so much of the press seems to fail to understand, that people feel that their living standards are under constant pressure and falling. The statistics confirm that there is indeed a Cost of Living Crisis.

One of the further consequences of falling living standards is that more people live in absolute poverty (defined as 60% of 2010-11 median income adjusted using RPIJ). According to the IFS projections, 500,000 more people, including 200,000 children live in absolute poverty in 2014-15 than when the Coalition came to power.

These dry statistics reflect the tough reality of life in austerity Britain for millions of people – but much of the media and the Tory party will seek to convince us otherwise over the next few weeks!

(All figures from IFS Briefing Note BN165 – Living Standards: Recent Trends and Future Challenges)