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11 March 2014

Downturn sees poorest households get £1,000/year poorer

The UK’s poorest households have suffered most from a decade of soaring energy and food prices combined with a fall in the value of real wages, according to new economic analysis from PwC.

PwC’s latest UK Economic Outlook (UKEO), published today [Tuesday 11 March 2014] says that the lowest earning 10% of the population have experienced cumulative consumer price inflation of 40% in the decade to the end of 2013.

That compares with inflation of 32% for the richest 10% of households, with the difference equivalent to an extra financial burden on the poorest households of around £20 per week – about £1,000 per year [See Note 1].

The impact of inflation is exacerbated by declining real household incomes and wages which, in real terms, are less than before the downturn

Median real UK household incomes [See Note 2] are now around 7% below the peak levels seen in 2007; and while incomes are expected to recover gradually from 2015, it will be 2019 before they are back above pre-crisis peak levels after adjusting for inflation, the Economic Outlook says.

Average real wages have also declined sharply since 2008 and are unlikely to return to their pre-crisis peaks until around 2020; however, PwC also says that around 80% of the net increase in employment since 2008 has been in sectors with below average pay levels such as retailing, hotels and catering.

Commenting on the latest Economic Outlook, Dr Esmond Birnie, PwC’s chief economist in Northern Ireland, said that the UK economic recovery has so far been job rich but wage and productivity poor:

“The sharp decline in real wages reflects a number of factors, including falling productivity, January 2011’s VAT increase and rising import prices, although these effects are now starting to fade as the pound has risen and inflation has returned to target.

“Real household incomes should therefore gradually begin to recover, helped by strong employment growth and continued real increases in the basic state pension.

“Poorer households have suffered from higher effective inflation rates on average over the past decade, due in particular to rising food and energy prices, which represent a relatively high percentage of their budgets.

“There is also some evidence that Northern Ireland, Wales and Scotland have been disproportionally impacted by high energy prices and this is reflected in particularly high levels of fuel poverty rates [See Note 3] in Northern Ireland where, according to the Northern Ireland Fuel Poverty Estimates, around 42% of households are in fuel poverty.

“That compares to around 29% in Scotland and Wales, whereas fuel poverty is much less prevalent in England where the West Midlands is worst affected, with around 14% of households there in fuel poverty.

 “There are a number of possible policy options to support lower paid workers, but setting a higher income threshold for employees to start paying national insurance contributions would be one attractive option to consider for the Budget.”

The UKEO projects UK GDP growth to pick up from 1.8% last year to around 2.6% in 2014 before easing slightly to 2.4% in 2015 as consumer spending growth moderates. 

Northern Ireland is likely to experience the lowest level of regional growth in 2014 at around 1.9%, with London and the South East forecast to grow at 3.1% and 3% respectively and all UK regions seeing stronger growth this year than in 2013.

Esmond Birnie continued:

 “After a couple of sluggish years in 2011 and 2012, the UK economy is now gathering real momentum and is firmly on the road to recovery.

“Inflation has fallen faster than expected recently, and we expect it to remain at or slightly below target in 2014-15.

“We expect interest rates to be kept on hold in the short term but to increase gradually during the course of 2015 and continuing to ease up in successive years.

“Higher interest rates will help savers and reduce pension fund deficits, but borrowers (including businesses and government) might gain from locking in funding now for long term investments such as infrastructure and housing.

“With Northern Ireland having the highest level of negative equity amongst the UK regions, households need to bear in mind likely future interest rate rises in any decisions on mortgages or other longer term loans.”

Ends.

Download UKEO_March2014_Final_

Notes.

  1. It should be stressed that this calculation only reflects the estimated impact of differential effective inflation rates on households in different income groups over the period from 2003 to 2013. It does not include other influences on relative real income growth for these groups over this period.
  2. Median real household incomes are based on data from the DWP Family Resources Survey (FRS) up to 2011/12 and PwC projections beyond that date. These estimates include both wages and non-wage incomes. ‘Average real wages’ refer here to data on average weekly earnings from the ONS Labour Force Survey. In all cases, the Consumer Prices Index (CPI) has been used to calculate real trends in incomes and wages. Further methodological details are contained in the full report.
  3. A household is defined as being in fuel poverty if it would be required to spend more than 10% of its income (including Housing Benefit or Income Support for Mortgage Interest) on all household fuel use.

Ends.

Contact details

Email: Esmond Birnie

Tel: +44 (0)28 9041 5808

Email: John Compton

Tel: +44 (0)28 9041 5663