In its report – The State of Living Standards – the think-tank said average living standards had finally stopped falling, before adding that the recent economic downturn had “squeezed incomes far more severely than either the 1980s or 1990s recessions”.
Because of the “permanent damage” it has caused, UK living standards are expected to remain anaemic and unlikely to fully reclaim lost ground for a considerable amount of time.
According to the think-tank’s in-depth review of household incomes, in 2019 average living standards will still be 3.5 per cent lower than they were in 2008, with some salaries not expected to recover to pre-crisis levels until at least 2022. Its projections suggested that median household incomes would start to climb slowly in 2015 but faced a massive challenge to compensate for years of economic turmoil, particularly without stronger wage growth or a sharp rise in investment.
The Resolution Foundation calculated that average pay packets would need to rise in real terms by 1.9 per cent until 2018 to avoid a recovery built on running-down savings. As an example of the impact the recession had on disposable income, the report said that median household income fell by 5.4 per cent from 2008 to 2012, and by 6.6 per cent among low to middle income households.
This fall in wages, coupled with rising food and fuel prices, means those with savings were being forced to dip into them to get by.
James Plunkett, director of policy at the Resolution Foundation, said: “Despite the strengthening recovery it looks like we are set for several years of very weak income growth. It is increasingly clear that the long downturn has permanently changed the course of living standards, with effects continuing to play out.
“As things stand, the recovery rests on consumer spending. And that spending rests on a diminishing savings rate, not income growth. With so many households already struggling with their debts – even with rates still low—a savings-led recovery is not a happy prospect.”
The report’s discovery was strikingly similar to statistics published by the Office for National Statistics in December, which also reported a sharp fall in median disposable income since the economic downturn. According to the ONS’ data, the economic downturn saw median disposable income for working ages drop by 6.4 per cent.
In addition, both reports confirmed that only retired households saw incomes rise during the recession. According to the Resolution Foundation’s findings, from 2008 to 2012 the median income among working-age households fell by 6.2 per cent, whereas the incomes of pensioner households rose by 1.1 per cent.
The disparity between income levels of workers and retired households during the economic recession came as no surprise to Trystan Lewis, chartered financial planner at Chester-based Griffin Wealth Management, who observed that stagnant salaries reflected the difficult plight of average wage earners and pensioners in Britain today.
He said: “Unfortunately, as a result of the recession, living standards of many working families are under pressure while inflation is increasing faster than the vast majority of incomes. Businesses are keen to control staffing costs and until the existing optimism surrounding the recovery turns into sustained belief that things are improving, we might not see incomes keeping pace with inflation.”
On the other hand, Mr Lewis added that pensioners of the baby-boom generation have prospered in this period because of final salary pensions and a culture of saving. He said: “We are witnessing arguably the wealthiest pensioners this country will ever see. Many pensioners benefit from ‘gold plated’ final salary pensions and also retain savings, having grown up in a generation with the mentality to save for the future.”
Daniel Liberto is a feature writer at Financial Adviser
