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Why the rising economic tide won’t lift all ships

June 30, 2014

New report: A Minimum Income Standard for the UK in 2014

There is no single rule determining whether inequality rises or falls in booms and recessions. In a downturn, rising unemployment feeds inequality, but this can be offset if benefits maintain their value while real wages fall. A boom, such as the one in the 1980s, may benefit primarily better-off groups, but from the mid 1990s to the late 2000s, fruits of growth were more evenly distributed.

In the downturn after 2008, the pain was also spread quite widely, even though it was felt most keenly by those who had least to start with. But will the same be true if we now have another sustained period of economic growth?

My guess is that this will be a recovery with very different gains for different groups. However, unlike in the 1980s when those who started with most tended to gain most, this time it will depend as much on your age and household type as on your income. If you are a pensioner, a well-off family or a working person without children, a return to growth in real earnings will boost your income. (The restoration of a link between the state pension and earnings for the first time for 35 years means this is not just true for those presently in work.) If you are of working age and not working, or a working family with a relatively low income and getting help from the state, your reliance on the public purse will point the other way. Neither in nor out of work benefits for working age people are being uprated in line with inflation any more. Working families getting tax credits or Universal Credit will see most of any earnings growth clawed back by reduced entitlements from the state.

Our latest report on minimum income standards shows how it has already become more difficult for a family with children to earn enough to make ends meet since 2008, at a faster rate than for a single person. In fact, in our first MIS study in 2008, both families and singles needed similar earnings – around £13-14k per working adult – to reach the standard. Now it’s £20k for each member of a working couple with children, and £16k for a single person. The gap has widened because the support that working families rely on to help them get to an acceptable income has been cut in real terms.

These cuts will continue. The upshot of all this is that low income working families, who were the most favoured target of Gordon’s Brown’s largesse as chancellor in the last decade, are becoming the biggest losers in this one, as the Brown settlement is unwound. q

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