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No income growth predicted in next two years

Written By:
Guest Author
Posted:
05/05/2017
Updated:
05/05/2017

Guest Author:
Paloma Kubiak

Incomes in 2021/22 will be more than 15% lower than expected before the financial crisis – equivalent to over £5,000 per household per year on average, according to projections from the Institute for Fiscal Studies (IFS).

As part of the IFS’ independent pre-election analysis, it found the average income was only around 5% higher now than in 2007/08 – more than 10% lower than might have been expected before the recession, based on historical growth rates.

The think tank said that if the Office for Budget Responsibility (OBR) was correct about the outlook for employment, earnings and inflation, then its own projections suggested there would be no real growth in average income over the next two years, and only modest growth thereafter.

This would leave incomes in 2021/22 more than 15% below where the IFS might have expected before the financial crisis hit – equivalent to over £5,000 per household per year on average.

It also said the growth rates masked substantial differences across age groups as the average income of those between 22 and 30 was only now recovering its 2007/08 level, while pensioners had seen sustained increases, with their average income growing by nearly 15% over the same period.

Income growth had been slightly slower for high-income households which helped reduce some income inequality, though the IFS said this group benefited most from falls in mortgage interest payments.

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Rising inequality

But the IFS projected increases in inequality because forecast growth would benefit higher income households more and as cuts in the real value of benefits would reduce incomes among poorer working age households.

As such, it said that real incomes were projected to fall among the poorest 20% of households over the next five years, with households with children being particularly affected.

Tom Waters, a research economist at IFS, said: “The defining feature of the past decade has been slow growth in incomes, not rising inequality in incomes. While average incomes have begun to recover over the past few years, official forecasts imply no income growth at all over the next two years, thanks to higher inflation and weak growth in earnings, and weak income growth beyond that.

“That would leave incomes at the end of this coming parliament more than 15% below where we might have expected before the financial crisis hit – equivalent to over £5,000 per household per year on average”.