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31 January 2014

The IFS douses Tory optimism on living standards

The Institute for Fiscal Studies warns that there is unlikely to be a "strong recovery" in living standards and that wages are still likely to be lower in 2015 than they were in 2010.

By George Eaton

Prices are still rising twice as fast as earnings, according to the ONS, but the Tories have recently come close to declaring the “cost-of-living-crisis” over. Last week they produced figures showing that “take-home pay” rose last year (once the increase in the personal allowance was included) and claimed almost everybody was better off. Unfortunately for them, the data was riddled with more holes than an Iain Duncan Smith press release. It took no account of the large cuts to in-work benefits, excluded 4.36m self-employed workers (most of whom have suffered disproportionate falls in their incomes) and also left out the millions of workers who don’t earn enough to pay National Insurance. 

Exactly a week on, the Institute for Fiscal Studies has doused the Tories’ triumphalism with more cold water. Its 2014 Green Budget warns that “There is little reason to expect a strong recovery in living standards over the next few years” and that it is “highly unlikely that living standards will recover their pre-crisis levels by 2015-16”. In other words, while real wages will eventually crawl above inflation, Labour will still be able to go into the election telling voters that they’re worse off than they were in 2010 (Miliband’s “Reagan moment“). 

The large benefit cuts introduced by the coalition (many of which, such as the bedroom tax, the benefit cap, and the 10 per cent reduction in council tax support, only took effect in April 2013) and the public sector pay cap of 1 per cent mean that, particularly for the low-paid, there is much pain to come. As IFS head Paul Johnson says: “If you look at incomes it looks like the poor are going to do rather badly and the somewhat better off, a bit better over the next couple of years.”

The Tories’ hope is that while living standards will be lower in 2015 than they were in 2010, they will at least be able to claim that the trend is moving in the right direction. Their message will be that handing the keys back to Labour would risk reversing all of the progress that has been made. To this, Labour will reply that a car that is taking this long to reach its destination needs a new driver. The data continues to suggest that it will have no trouble making that attack. 

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