Gap widens between income and the cost of living, new research reveals

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New research from Loughborough University published today (1 July) reveals that the gap between people’s incomes and the amount they need to cover their essential costs has widened dramatically since 2008.

This is despite the fact that the cost of a decent standard of living, as defined by the public, has stopped rising for the first time since the recession began.

A Minimum Income Standard (MIS) for the UK, funded by the Joseph Rowntree Foundation (JRF), is calculated annually by Loughborough University’s Centre for Research in Social Policy (CRSP). It is an annual living standards benchmark which provides a barometer of what has happened to living standards for low income families since the downturn and during the recovery.

This year’s analysis finds that for the first time since 2008, the amount families need to earn to reach a minimum, socially acceptable standard of living has fallen.

Low and negative inflation in 2015 has meant the cost of what you need to meet the MIS remained the same. Additional factors have also helped to narrow the gap between earnings and outgoings for many low income households in the last year, bringing welcome respite. These include:

  • An increase in the personal tax allowance
  • Uprating of out-of-work benefits by 1%
  • Slightly above inflation increases to child benefit and tax credits.

But the budget gap between the incomes of low income families and the cost of a decent standard of living is still much wider than before the recession began – both for those earning the National Minimum Wage (NMW) and those reliant on out-of-work benefits.

Compared to what the public say people need for an acceptable living standard, in 2015, for those on the minimum wage[1]:

  • Single people were £27 short in 2008, and £52 short in 2015
  • Couples with two children were £31 short in 2008, and £74 short in 2015
  • Lone parents with one child were £4 short in 2008, and £38 short in 2015.

Those who are reliant on safety net benefits face even bigger shortfalls:

  • Single people were £100 short of reaching MIS in 2008, and £109 short in 2015
  • Couples with two children were £148 short of reaching MIS in 2008, and £196 short in 2015
  • Lone parents with one child were £74 short of reaching MIS in 2008, and £117 short in 2015
  • Pensioner couples were £11 above MIS in 2008, but £10 short in 2015.

Since 2008, average wages have risen by 12% and the minimum wage has risen by 18%. Over the same period, the cost of the goods and services which people need to achieve MIS has risen by 29%. The value of benefits has fallen in real terms. In 2015:

  • Single people need an income of £17,100 a year before tax to achieve MIS, up from £13,500 in 2008 and the same as 2014
  • Couples with two children need an income of £20,000 each to achieve MIS, up from £14,000 each in 2008 and slightly lower than the £20,300 needed in 2014
  • Lone parents with one child need an income of £26,700, more than double the £12,000 needed in 2008 but lower than the £27,300 in 2014.

Despite flat inflation for most items, and cuts in taxation, single adults must earn the same as last year to achieve the same standard of living, as rent rises swallow up any gains. Inflation is predicted to begin rising again by the end of the year. This means that even with rising wages and further tax cuts, those relying on benefits and tax credits could become worse off unless they are increased.

Donald Hirsch, Director of CRSP and author of the report, said: “Near-zero inflation is a particularly welcome relief for families whose income relies partly on benefits, which are no longer increased automatically in line with prices. But modest inflation is expected to return. Even though earnings are forecast to grow healthily in the next few years, rising prices will prevent low earners from becoming better off if their tax credits are frozen – and more so if threats to cut them are implemented in the forthcoming Budget.”

Julia Unwin, JRF Chief Executive, said: “After seven years of declining living standards, the pause in rising costs is a very welcome respite. But many low income households are still much worse off than in 2008, leaving them struggling to make ends meet and reliant on benefits to top up their incomes.

“A couple with two children who each earn the minimum wage faces a shortfall of almost £4,000 a year between their incomes and what the public say they need for a minimum standard of living. We need to see action to raise wages, build more genuinely affordable homes and tackle the UK’s low productivity to help people get on at work.”

[1] All figures are per week, in 2015 prices

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