View the article online at http://citywire.co.uk/money/article/a621657
What will your income look like in 2020?
A think-tank has predicted just who the winners and losers will be when the UK's economy finally gets back on the right track.
Party conference season will soon get under way, and the politicians will be duking it out over strategies to boost economic growth. But one think-tank has looked at who will benefit from economic growth, and it’s not everybody.
Resolution Foundation published the 'Who gains from growth? Living Standards in 2020' study, which shows not everyone in the UK will benefit from economic growth over the next eight years.
Growth is a key area of policy for political parties, and a clear dividing line. Currently, the coalition government is pushing ahead with its austerity programme: reducing public spending in order to reduce the budget deficit. Chancellor George Osborne famously said ‘there is no plan B’.
Labour, on the other hand, wants to spend its way out of recession, injecting money into the system to create jobs and invest in the country.
Who gains from economic revival?
Looking ahead to 2020, those on middle incomes in mid-level jobs will find themselves worse off, those on lower incomes will see incomes fall as benefits are cut, but those on higher incomes will be better off.
There are two main factors behind this shift: changes in income and changes in employment patterns. The predictions made by Resolution Foundation assume no fundamental changes to policy are made, with modest growth in 2015 taken into account and average growth of 2.5% from 2015 to 2020, which the report recognised now ‘looks optimistic’ when compared with recent forecasts.
Last month, the Bank of England slashed its 2012 UK growth forecast to zero from 1.25% and warned growth will be weaker than predicted next year. Bank governor Mervyn King said he does not expect to see the economy return to its pre-recession peak until 2014.
Where’s my income gone?
With a government looking to save money it is no surprise that incomes will suffer, and the report predicted living standards for working-age households in 2020 are likely to be ‘substantially lower’ for those in the bottom half of the income pool than they were a decade earlier.
A low-income household with a net income of £10,600 a year in 2008 will see it fall to just £9,000 by 2020 – a 15% drop in real terms. A middle-income household with a net income of £23,000 in 2008 would see a 3% fall to £22,000 by 2020.
Only households with higher incomes will see a growth in income of 2%.
The large fall in income for the poorest in society is blamed on the government’s decision to link benefits to the consumer price index (CPI) instead of the retail price index (RPI). CPI does not rise as quickly as RPI, meaning benefits will increase at a slower pace.
The report warned that indexation to CPI means poor households will ‘fall steadily behind’ other households, particularly if there are children in the family.
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