Living standards report shows bleak future of a divided Britain

Independent study suggests rich will get richer and the poor poorer as chancellor plans further £10bn of welfare cuts
The Observer, Saturday 22 September 2012 21.29 BST

Chancellor George Osborne has been accused of ‘waging war’ on Britain’s poor.
Living standards for low- and middle-income households will fall until 2020, even if the country enters a golden period of steady economic growth, according to an incendiary analysis of deepening income inequality in Britain.

The independent study, carried out for the Resolution Foundation by the Institute for Fiscal Studies and the Institute for Employment Research, paints a stark picture of a nation increasingly polarised between a poorer half whose incomes are set to fall and a top half whose living standards will continue to rise.

As the political conference season opens in Brighton this weekend with Nick Clegg’s Liberal Democrats promoting themselves as the party of “fairness” in austere times, the research will pose far-reaching questions for politicians across the spectrum. The chancellor, George Osborne, has been accused of “waging war” on Britain’s poor as he looks to cut a further £10bn from the welfare budget by 2016. But as pressure grows on the government to ease austerity measures and launch a push for growth, the new study makes clear that even a resurgent economy will not solve the problem of Britain’s increasingly divided society.

Entitled Who Gains from Growth?, the study makes clear that future prosperity for the bottom half of earners depends on a policy revolution on several fronts: increasing the number of women in work, boosting training and skills, and raising wages for the lowest paid. Without this, the report finds, a typical low-income family will see its net income fall in real terms by 15% by 2020 – down from £10,600 (at 2009 prices) to just £9,000 at the end of the decade (again at 2009 prices).

A typical household close to middle income could expect to see an income of £22,100 in 2020 – a 3% fall from £22,900 in 2009. Overall, by 2020 families who depend on benefits could expect to see an annual decline in income of 1.7%. Meanwhile, the top 50% of households can expect their living standards to grow by 0.2% a year to 2020; and faster for the most affluent. A typical middle income for a working-age couple is roughly £30,000 before tax, rising to £42,000 for a couple with two children.

The findings are all the more alarming as they are premised on generous growth projections for the period between now and 2015, averaging 1.5% a year, and average growth of 2.5% from 2015 to 2020 – levels most economists would currently regard as relatively optimistic.

Professor Mike Brewer, research fellow at the IFS, said all the signs were that with current government policies the trend would be strongly against income growth for the bottom half of households.

“This analysis confirms the strong currents that will be pushing against income growth in the next 10 years, even once a recovery in GDP takes hold,” he said. “Britain looks likely to see continuing polarisation in our labour market as more high-and low-paid jobs are created, skewing the distribution of income growth towards higher income households.

“Meanwhile, support through the tax and benefit system is set to fall over the long-term, meaning that lower income households will tend to fall behind.”

The study identifies several reasons for the deepening divide in living standards. While new jobs are being created, it finds that many are at the top and the bottom of the income scale, with few in the middle. By 2020, it says, Britain can expect 2m more jobs in high-paid professional and managerial occupations and also growth in low-skilled service roles, with more than 700,000 new positions in retail, caring and leisure. But more traditional jobs in the middle – from skilled administrative roles to skilled manufacturing – are drying up.

Gavin Kelly, chief executive of the Resolution Foundation, said: “This is a powerful wake-up call – it gives us the most detailed account to date of the bleak outlook for living standards over the next decade if we fail to tackle some of the underlying weaknesses in our economy. It suggests that millions of families will struggle, to an extent we have not seen in other periods of growth, to progress and raise their incomes. It’s particularly sobering that this outlook is based on optimistic assumptions about growth in the economy with a steadily rising number of people in employment.

“Just as importantly, the study suggests some of the positive choices that could be made that, if taken together, could make a major difference to the living standards of millions of low- and middle-income households over the next decade. It provides us with both a stark warning and the outline of an alternative path.”

In exploring possibles routes out of the crisis, the report examines what the effect would be if wages for low earners were to grow at the same rate as they did in the decade around the introduction of the national minimum wage in 1999. It also projects a future in which Britain matches the proportion of women in work achieved by the best-performing OECD countries, such as the Scandinavians, which is likely to require a big expansion of childcare provision. And on training it looks at the effects of improving intermediate skills, meaning developing vocational training.

For a typical middle income family, the effect of making all three changes would mean an extra £1,600 a year in 2020 compared to Britain’s current path.

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