Coronavirus struck as households were still dealing with hangover from last financial crisis following ‘unprecedently bad decade’, IFS says

Growth in UK living standards had suffered an “unprecedentedly bad decade” even before the coronavirus crisis hit, new research suggests.

A report published by the Institute of Fiscal Studies (IFS) highlights the stark impact the past 10 years has had on households, which it said were still suffering from years of stalled productivity and poor growth 12 years after the financial crash of 2008.

The research showed that income had stayed essentially at the same level in 2018-19 as it had been five years prior.

“This was entirely due to falls in benefit and tax credit income, which offset growth in employment incomes,” said the IFS report.

“Just the failure to uprate most working-age benefits and tax credits in line with inflation over that period reduces their real value by 5 per cent.”

Housing benefit and universal credit have been temporarily increased as part of the government’s coronavirus relief measures, but even so, out-of-work households are on average entitled to around £1,600 per year less than what they would have been without cuts since 2011, the IFS said. For out-of-work households with children, this rises to £2,900.

Income growth stalled for those at the median line, which did not rise at all between 2016-17 and 2018-19 after the UK voted for Brexit, which led to a rise in inflation.

The IFS research also revealed that absolute poverty only fell by two percentage points between 2007-08 and 2018-19, marking a “historically small reduction” in absolute terms since records began in 1961.

“Median income had also grown less than over any decade since records began, and among those under 60 it was just three per cent higher than in 2007-08,” said the research body.

A growth in employment among people aged between 25 and 64 was “the main thing helping income growth”, it added. Employment grew particularly among women, ethnic minority groups, older people, lone parents and immigrants – groups which historically have relatively low levels of employment.

However, real average hourly wages in 2019 were 2 per cent below where they had been 12 years before in 2007.

“But we are now in danger of being reminded all too clearly that no pay growth can still be better than no jobs at all,” said the IFS in its report.

“In an especially cruel twist of fortune, the specific nature of this shock affects the most vulnerable the most, with those already in poverty more likely to be in shut-down sectors and less likely to be able to work from home.”

Pascale Bourquin, a research economist at IFS and author of the research, said: “The fate of household living standards over the coming years will hinge on how fast the economy can recover from the damage caused by Covid-19.

“The years following the great recession do not provide a good blueprint for a bounce-back. In the last decade, we have witnessed the slowest growth in household incomes since records began as earnings and productivity stalled and working-age benefits were cut sharply.

“We now have the dual challenge of trying to recover the ground people have lost in their careers and employment prospects, and addressing the problems we already had.”

Helen Barnard, acting director of the Joseph Rowntree Foundation, which funded the research, said the coronavirus crisis exposed problems that families in poverty have already been dealing with for a much longer period of time.

“Finding a lasting solution has taken on a new urgency as the crisis has shown how close many of us are to being swept into poverty when circumstances change.

“The government’s levelling-up agenda is now more important than ever and it can’t be left to drift. Redesigning our economy so that it works for everyone has the potential to deliver a strong recovery and loosen poverty’s grip at the same time,” she added.