The past five years have seen ups and downs for wage earners, in terms of average pay keeping up with inflation. After dipping in the recession, real pay started to rise again in 2014. The main beneficiaries were private sector workers, although when inflation hit zero even those affected by the 1% public sector pay cap saw modest increases in real terms. But this year, the return of inflation meant that real pay has again flattened overall, and is falling for public workers.
Having spent nearly a decade awaiting a return to the previous norm of steady real wage growth, it’s probably time to recognise that we’re stuck in this spluttering stop-start cycle for the foreseeable future. For many workers, the best hope is that they will gain on the swings – of modest pay rises and low inflation – more than they lose on the roundabouts of negative real pay growth.
But for the large proportion of working families (slightly more than half) whose low income entitles them to additional help from the state, current policies make the prospects grimmer than this. The government has frozen the level of this help, and also the income level at which it starts being taken away.
This means that when earnings fall in real terms, such families take a double hit. First, from their reduced real earnings; second from the declining real value of their tax credits. That’s what’s happened this year to someone with an average pay rise of 1% – well behind the increase in minimum family living costs, which our latest MIS research shows to have increased by around 4%. Both their pay and their benefits are falling well behind inflation.
More fundamentally, this year has shown how such families can fall behind even when their earnings do keep up with rising costs. Families earning the National Wage have seen above-average pay increases, slightly ahead of general inflation, and about the same rate as our minimum cost calculation.
But this does not allow them to keep up in net income terms. The benefits freeze means first of all that the portion of family income coming from the state is falling in real terms, even as earnings rise with inflation. And the net value of that pay increase is greatly reduced by its subjection to a means test. For each extra pound earned, about three quarters is lost in additional taxes and lower tax credits. This loss is only very partially being offset by a rising tax allowance.
The net result is that even a family whose pay is keeping up with rising costs has becoming worse off, relative to costs, by about £500 a year.
Looking ahead, as long as there is even modest inflation at around the target level of 2%, families affected by this freeze will not become better off without huge pay increases. The only way to deliver on the promise to improve living standards for low income families will therefore be if pay improves and in-work support does not deteriorate.
Lifting the benefits freeze is a pretty simple ‘ask’ for Mr Hammond at budget time. Don’t make the worst off families even worse off.