What sort of a future awaits UK living-standards?

One of the features of the credit crunch era has been the feeling that we as individuals have not done as well as the aggregate official statistics tell us. One way of looking into that is to note that GDP per capita or person has underperformed the GDP figures during this time.

GDP per head is now 1.8% above the pre-downturn peak in Quarter 1 (Jan to Mar) 2008, having surpassed it in Quarter 4 2015…..

This contrasts with 8.6% above on the overall GDP numbers and it surpassed its previous peak in Quarter 4 2013. That was a change because as we ran into the credit crunch the per person number was doing better that the total.

Another way of looking at this is to examine the pattern of real wages. Even according to the official data ( which uses the CPI measure of inflation that ignores owner-occupied housing) real wages went negative in the middle of 2008 and did not return to positive territory until near the end of 2014. Whilst the improvement was welcome the worrying part was that it was much more to do with a lower level of recorded consumer inflation than any improvement in wage growth. This of course is concerning at a time when we are expecting higher inflation this year the theme of which was reinforced by the fact that inflation in Germany has reached 2.2% and even worse for living standards it was driven by rises in prices for two absolute essentials which are energy and food. But looking back real wages posted negative year on year changes for 25 quarters which contrasts with a general increase of 2% per annum before the credit crunch era. The UK statisticians have done a specific calculation for 2002-07 and it in fact averaged 1.9%.

Living-Standards

The Institute for Fiscal Studies has looked into these and suggested this today.

As is now well documented, incomes in the UK fell sharply in the immediate wake of the Great Recession, and have recovered only slowly since. The latest available data show real median income in 2014–15 just 2.2% above its 2007–08 level. This poor performance is largely due to wages (and ultimately productivity) – the large falls in real wages that characterised the recent recession and the weakness of real pay growth since.

In fact the numbers are boosted by pensioner’s incomes which we know have been boosted by the triple lock on the basic state pension for example. The picture deteriorates if we exclude that.

among the rest of the population, average incomes were essentially the same in 2014–15 as back in 2007–08.

They use 2014-15 because the official data has only reached there but they use other data to tell us where we are now and here it is.

The Labour Force Survey (LFS) indicates employment growth of around 1.6% in both 2015–16 and 2016–17. LFS earnings data suggest a 2.4% real rise in average earnings in 2015–16, but available LFS data for 2016–17 combined with the OBR forecast suggest that real earnings growth has slowed to 0.6% in 2016–17, thanks to both weaker nominal earnings growth and higher inflation. Taking these together, we project growth of 3.4% in real median income between 2014–15 and 2016–17.

So since the credit crunch hit real median incomes have risen by 1%, please do not spend it all at once! As we look forwards the picture is for more of the same.

The net effect of all these changes in earnings, employment and benefits is that in our central scenario, real median income is essentially unchanged for two years between 2016–17 and 2018–19.

So we remain on what is in essence a road to nowhere. I will go further and say that the experience has depended much more on what inflation has done than wage growth. When inflation falls we get real wage growth and when it rises we do not and if it is goes further we get falls. By contrast wage growth has not responded much to either the rise in employment or fall in unemployment meaning that the output gap style theories so clung to by the Ivory Towers and the Bank of England have yet another problem with reality.

Looking forwards to 2021

There is an obvious click bait element in projecting  this to 2021 but there is a large catch which is that the work uses the forecasts of the OBR or Office of Budget Responsibility. Regular readers will be aware that the first rule of OBR club is that it is always wrong. So please take more than a pinch of salt with this and maybe the whole cellar.

Beyond that, the steady rise in real earnings growth forecast by the OBR, and the (assumed) ending of the working-age benefit freeze in 2020–21, push up real median income growth for the last three years of the projection to an annual average of 1.2%. Taking the seven years from 2014–15 to 2021–22 as a whole, real median income grows by an average of 1.0% per year in our central projection – a cumulative increase of 7.4%.

Something else is then added which is to assume that the credit crunch had not happened and project the trend before it forwards. This has the problem it ignores the fact that it was an unsustainable boom but even so a little light is shed.

The falls in median income after the recessions of the early 1980s and early 1990s took it 8% and 9% respectively below its long-run trend up to that point. In our central projection, as outlined above, median income in 2021–22 is 18% below its long-run trend.

Pensioners

Some of you may be wondering about the number below?

Median income among pensioners, however, was 11% higher in 2014–15 than in 2007–08.

Actually there is a core existing group of pensioners who have not done so well but they have been joined by something of a golden generation who seem to have done rather well. The obvious examples that spring to mind are Baron King of Lothbury with his ~£8 million pension pot and Professor Sir Charlie Bean with his ~£3.5 million one ( although as ChrisL points out in the comments below they would affect an average measure more than a median one). Plus of course they have been handed post retirement jobs.

Housing Costs

There is some fascinating analysis of this which departs from the official claims in two ways as shown below.

However, in this report, we follow the HBAI methodology in deflating BHC and AHC incomes using different (appropriate) variants of the CPI. BHC incomes are deflated using a variant that includes mortgage interest payments (MIPs), dwellings insurance and ground rent, while AHC incomes are deflated using a variant of CPI that excludes rent. ( BHC = Before Housing Costs and AHC = After Housing Costs).

CPI does not have mortgage interest payments although in my opinion it should have both them and house prices. So maybe my influence has reached the IFS! Even more so when they exclude the rent which of course we are told will be used to measure owner-occupied housing costs as part of CPIH in a week and a bit.

Comment

As ever we find that once we look below the headline data the situation deteriorates for the ordinary person. The “lost decade” principle appears as we note that there must be more than a few people who have real incomes less than ten years ago although most have gained a little if not much. As we break the groups down we see that those who have been retiring recently have been something of a golden generation which looks unlikely to be repeated.

So small gains which sets the tempo for now although there are dangers of a dip as inflation rises. If we are lucky we will arrive in the next decade having gained a little bit more but with the rider that economic life regarding wages and incomes is far from what it was.

 

 

 

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31 thoughts on “What sort of a future awaits UK living-standards?

  1. Great article as always. How is it that the boe cronies can have pension pots vastly larger than the 1m limit we proles are allowed to have?

    thanks

    • I believe it is because, when MPs passed laws relating to the pensions cap, they did not realise that defined benefits schemes do not have a pot of capital and are therefore not caught by the cap.
      Almost anyone lucky enough to have a final salary defined benefits scheme is far better off than anyone with a pension pot, given the lousy annuity rates on offer.
      I believe that some years ago, it was calculated that you only have to be an MP for 8 years to have a pension equivalent to the pensions cap, but I may have mis-remembered the figure.

  2. Shaun,

    I note median income is quoted for pensioners so those gold plated ones have an influence?

    Triple lock highlighted but only on the state pension for lesser mortals without RPI linked private pensions. Usual divide & rule on generational lines perhaps?

  3. You say, quite rightly that the situation is deteriorating for many, if not most, and things certainly do not look good going forward.

    But the situation you describe is worse because it is contrary to expectations but is it the expectations that are the anomaly and not the actuality?

    During the Middle Ages living standards were virtually static for five hundred years and the idea of continual progression is one that is very recent. Why should we expect living standards to go on increasing year after year? We do expect it that is certain but is that reasonable?

    Living standards are in no small measure dependent on technological progress but that does not happen in a straight line nor is it continuous. If you read Robert Gordon’s book: The Rise and Decline of American Growth you will see that we’ve been on a downslope as far as innovation is concerned for some years and that situation is little more than common sense; there is no reason why innovation should keep coming along to keep living standards improving.

    It seems to me that it’s not the economy that is the issue; it is our expectations.

    • Bob , its our political system is it not ?

      If we dont have endless growth and therefor everyone’s standard of living increases ( a rising tide lifts all boats ) then someone will start asking questions

      like Is Bill Gates really worth all those Billions ?

      this then leads to calls that the wealthy pay more tax or even why is my pay rises smaller than my CEO

      or for that matter why did Merve the Swerve get 8 million in his pot linked to RPI and mine’s limited to much much less and linked to the lesser CPI ?

      they might then question a political system that allows wealth to shift upwards and makes people in the lower and middle classes poorer .

      they also might ask why if productivity has improved for each worker so much over the past 30-40 years why they still have to work so hard and get so little ….

      then they might start thinking about giving their support to people far worse than Farage or Trumph ……

      I have often posited that we’re seeing the start of the New Medieval period – like Dune or Homeworld ( Harry Harrison) .

      Forbin

  4. The political system is important but how often do the discoveries of electricity; germs; sanitation; internal combustion engine; air travel etc come along? Not that often. The political system is about the distribution of the pie, not its creation and, without wishing to state the obvious, you cannot have arguments about distribution unless there is something to distribute.

    Robert Gordon said: “Economic growth is not a steady process that creates economic advance at a regular pace, century after century. Instead progress occurs much more rapidly in some times than others.”

    I am far more interested about how we get more food in the trough than about the fact that there are occasionally pigs around that may take more than their fair share.

    • I am far more interested about how we get more food in the trough than about the fact that there are occasionally pigs around that may take more than their fair share.
      ______________
      Trouble is, there are 1% of pigs who are not just taking “more than their fair share” they are taking over 50 fair shares.

      High time they were forcibly dispossessed.

    • Technology invention and progress happens with political / economic systems that reward the inventors. Corruption stymies this, as does nepocracy and aristocratic priviledge. British tradition is used as an excuse to continue a monopoly on building land, with feudal rents rewarding the landed gentry. These are so extortionate that they are bankrupting the country and wrecking the health system, education system etc.

      According to the Economist, we need both economic growth and fairer distribution to beat global poverty. Distribution is an issue given the vast wealth of the oligarch class.

      • Indeed but the title of this blog is “What sort of a future awaits UK living-standards?” not the defeat of global poverty.

        The point here is that the distribution of income can be fixed by the political system but you cannot “fix” innovation just as you cannot just cure cancer; it’s more complicated and depends on things you cannot control.
        Fundamentally it is technological progress that determines living standards.

        • IMHO the quote is also appropriate to the UK. Growth increases average wealth, but if the oligarch class take all the gains then expect political upsets, nationalist scoundrels and snake oil sellers.

          I don’t mind capitalists making strong profits, but I do mind lying oligarchs dodging tax. We tend to object to exploitative employers – Sports Direct feudal working conditions do not constitute invention, only exploitation. Likewise the UK needs to tackle excessive rental costs – monopoly or cartel is normally illegal.

          I agree that technological progress is necessary and useful, but I disagree on distribution – social justice is beneficial even to the rich. Their businesses mostly depend on educated healthy workers. (Except the abusive employers) They find it safer to appear in public in equitable societies – even the Economist wrote about Trump Towers New York looking like the gilded prison of a leader deeply unpopular in his home town.

        • ExpatinBG

          “IMHO the quote is also appropriate to the UK. ”

          If you read this:https://www.equalitytrust.org.uk/how-has-inequality-changed

          This shows that the Gini coefficient has changed relatively little in the last few years and is stable.Although it reached a peak in 2009 it has been stable since so it is difficult to relate this position with declining living standards (past or future); you would presumably expect a steadily increasing Gini coefficient if your argument had merit. There appears to be no clear link between inequality and living standards,certainly not in recent years. It is not an argument that I would dismiss but it has to be proven and it is not proven.

          Technical progress is I suspect much more important but, unlike income distribution, much less easy to fix. I believe the distribution of income is marginal, not completely insignificant but marginal.

          One thing I didn’t mention but should have is the increasing cost of energy and this is having and will have also a major influence on living standards (if you are familiar with the acronyms: EROEI and ECoE you will know what I am talking about.

    • Indeed progress is not a straight line. The agricultural and (even more) the industrial revolutions produced extraordinary wealth over a very short period. It then took time and incredible effort to stop all the wealth accruing to the (very very) few. Just read Engels or Hard Times. Today’s Russian oligarchy is not dissimilar to the American one around 1900, where individuals owned whole industries.
      The question is whether you can improve the lives of those not in the 0.1% by redistributing the wealth of the rich, or whether this just stifles the growth engine.
      If you look at the powerhouses of modern technology, whether it be Google, Snapchat, eBay, Apple, Facebook, Microsoft, Oracle, they have one thing in common. They are American and have given astounding rewards to their founders. I have no idea whether, if you denied these people their gigantic wealth, whether the rest of us plebs would be better or worse off.
      On the other hand, the UK excels in paying utterly ludicrous amounts to paper pushers aka bankers, lawyers, city folk in general. The sheer utter pointlessness of these jobs coupled with the obscene rewards are obviously indefensible.

      • Ebay generates value for plebs. A friend in England cleared out her loft and ebayed the old stuff she didn’t want for several thousand pounds. Buyers can find stuff otherwise unavailable etc. Ebay helps me cut shopping costs – last year’s model skis new ex shop at half price and many other bargains. As always cavaet emptor.

        skype is excellent for international plebs and it seriously disrupted incumbent telecom monopolies.

        As for microsoft and oracle, I don’t know. They have open source, free software competitors including linux and postgres. Maybe they offer better service / marketing.

  5. I’ve listened to the coverage all day and just had the misfortune to hear Baroness Kramer holding forth on the issues on Sky News.As ever,she didn’t miss the opportunity to display her sheer ignorance before trying to blame it all on Brexit and austerity.

    There was no mention by her of per capita averaging not least given high levels of migration over the last 15 years.

    And of course there was no mention by her of the extortionate cost of residential housing and the role it’s cost has played in ruining many lives and degrading living standards.

    As ever,there was utter delusion about the viability of the Triple Lock and the fact that the people who are paying for it are the people who will likely never receive anything like it when they retire.

  6. Shaun,
    I find it incredible you should doubt the output gap that has to exist in the UK. The BoE is too polite to call the “record levels of employment” total BS but I am not. That record is underemployment, self employmentand outright fiddling of the figures.

    • Yes i fall into this bracket, work via my limited company pay myself tax threshold and coin in the tax credits as i’m a single parent father. I get something ridiculous like £720PCM all in just for being alive. (i dont claim Housing Benefit if id get close over £1500PCM all in)

      When the magic money tree people first started putting this amount in my bank i called them saying they’ve put too much in and made a mistake, but to my amazement they assured me it was correct …this is around the time that entrepreneurial 16 hour a week nail technician on Question Time was having a breakdown about the possibilities of the free money tree dishing out slightly less.

      I always worked normally (full time) and saved a significant deposit to buy a house, but prices have gone up by 40% in just a few years thanks to the Tory Party and BoE meaning i may as well not have bothered working/saving and in hindsight should have bought at what look like bubble prices in 2013/14. (now i’m totally priced out thanks to Gidiot HTB1/2 and Carney ZIRP/FFL/TFS more QE)

      So now i see there being no point in working too hard as despite being able to earn an above average wage. It’d never able me to afford to buy a decrepit ex council house in a bad part of town in the area i live (such places cost 240K).

      So this is what 20 years of Blairite neoliberalism and close to a decade of QE and ZIRP, created by incompetent fascists like Carney and the central banksters has achieved. A nation where working folk can’t be bothered as they’ve no tangible stake in society and are fleeced by bankers and landlords.

      And still the MSM don’t hold the government to account on this as they’re sponsored by banks/builders and are neck deep in profiting from the ponzi scam.

      The future of UK living standards is here today … though i think it will get better for workers when the aforementioned magic money tree dies and stops sponsoring people to do little or nothing. Just the govt/BoE/corporations will do everything in their power to keep the magic money tree alive.

      • Arthur, heartfelt and your position is reflected by a growing minority. I believe the money tree is very precariously balanced. With each incremental increase in assets values therein is the weakness of the ponzi. Since it’s all paper, there’s been no innovation or productivity a great levelling will ensue. Make sure you have skills and drive to benefit when the time comes. Paul

        • It isn’t a minority, with the early 40s and under its becoming the norm.

          Friends who have what should be ok little businesses such as car mechanic garages and body repair shops just tick over knowing tax credits and housing benefit will enable them to make ends meet.

          Another friend who has works as a plumber lives in 2 bed hovel above a shop with his wife and 3 kids, sticks much of his wages in a pension so he can get tax credits and Housing Benefit, as if he took his full wage he’d be no better off and still only able to afford such a place.

          This is 2017 UK living standards for the priced out, no chance of being able to afford a simple house with wages so let the state foot the bill.

          Donald Trump is my best chance of owning a house(a remarkable state of affairs), should he act against the FED in the way he has stated over the years … then the Tory party will follow suit with the BoE. I doubt he will!

        • Arthur, be careful what you wish for, as you might get it. Donald Trump knows more about bankruptcy than anyone and Donald Trump does bankruptcies better than anyone ….. and those close by (his employees, subcontractors, lenders, etc came of worst)

          What might a Western bankruptcy look like ? We might compare the mortality statistics and poverty and hardship in the formerly centrally planned economies following the USSR’s bankruptcy.

    • Hi Bill

      Let me be more specific about the “output gap”. Official bodies use official statistics where it has simply not been shown.. It is quite different to suggest that the largely under recorded levels of underemployment may be a factor. But they ignore all that and plough ahead with numbers that do not work.

  7. Hi Shaun
    A lot of interesting comments today.
    When I first commented on your blog I said I thought we were at the start of a 20/30 year period of leveling of living standards across the world. This would be partially be due to rises in ‘developing’ nations, but also declines in (mainly) western nations. I thought the main drivers were globalisation, robotisation, and population age-profiles across nations. I further thought that there was a rise in the power of a global elite that basically drove this situation whilst feathering its nest. We ( and other commentators such as Forbin etc) had many comments about analogies with BNW, 1984 and Dune. I think we all rather favoured the Dune model of a decline to a new global feudal system.
    I have seen nothing that changes these views, but rather have understood more about how apparently disparate movements, such a ‘global warming’ are used to help control this process and provide vehicles for redistribution of wealth from developed to developing nations whilst allowing the elite to cream off their share as it moves.
    I am not a purveyor of ‘conspiracies’, more naturally a believer in ‘cock-ups’. But I am finding it harder and harder not to believe we are in the midst of a managed situation. Clearly brexit and Trump were not part of any plan, but whether they are merely small hiccups is yet to be seen. My current first hand experience of the US establishment response to Trump , ably supported by 95% of the MSM, gives me little cause for hope that the main trends will alter much.
    In consequence I think unfortunately that the median UK living standard will continue its decade long decline ( I don’t believe the official inflation stats for one second), and probably for at least two more decades.

    • Hi JW

      I remember your comment and it was one in a very long line of excellent comments made on here by lots of different posters. We mostly settled on a Harkonnen style Dune world which I note Forbin has already mentioned today.

      I still subscribe to the “cock-up” theory. It does not mean that there are no conspiracies around but they are often not as well organised as maybe they need to be. As to your conclusion I fear you are right but let us take Bob J’s point and how for a 2001 style “something wonderful” on the technology and/or energy front.

      • I am in the cock-up camp (just), but do think that the establishment simply will not consider things that might damage its pre-eminence subconsciously. For example, no-one really seems to contemplate policies that would crater house prices. While this may be for good reasons, it may also be that everyone who sets policy owns property, so the bias will be there. The same thing happened with the Brexit vote. The establishment couldn’t believe that the plebs could be so stupid, but that is because the establishment gets the upside (easy travel, second homes abroad, cheap nannies etc), with the slightly disappointing downside suffered by many, eg no pay rise for ten years.
        In economic terms, QE doesn’t really bother the establishment, but really affects normal people trying to buy houses (see above), as the low interest cost has simply driven prices beyond affordability.
        Conspiracy? I don’t know. Convenient for the great and good? Absolutely.

  8. “What sort of a future awaits UK living-standards?”

    Hahahahahahahahahahahahhahahahahahaaahhhhhahahahahahahhahahaaaaahhhhhhhahahahahahah.

  9. And my musical quote for you today Shaun is the Sex Pistol’s God Save the Queen:

    And there is no future
    In England’s dreaming

    No future, no future,
    No future for you
    No future, no future,
    No future for me

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