Inequality in U.K. Set to Widen as Crisis Casts 'Long Shadow'

  • Median income in 2021-22 to be 18% below pre-crisis trend: IFS
  • Low-income households with children seen faring the worst

Inequality in Britain is set to increase and poverty worsen over the next five years as earnings growth slows and planned welfare cuts start to bite, according to the Institute for Fiscal Studies.

The average household will be 5,000 pounds ($6,150) a year worse off in five years than could have been expected a decade ago, the IFS said in a report published Thursday. If Office for Budget Responsibility forecasts prove correct, the median income will show no growth over the next two years and be just 4 percent higher in five years, it said.

“Even if earnings do much better than expected over the next few years, the long shadow cast by the financial crisis will not have receded,” said Tom Waters, an IFS economist who helped write the report.

The analysis, coming less than a week before Chancellor Philip Hammond delivers his spring budget, will add to pressure on the government to ease the burden on the worse-off as the weak pound drives up the cost of staples including food and fuel. While uncertainty over Brexit will limit room for giveaways, stronger-than-forecast tax receipts may provide some scope for targeted measures.

The IFS based its estimates on the income projections made by the OBR in November. These showed average earnings growing by 2.4 percent this year and by 2.8 percent in 2018, only marginally above the rate of inflation. According to the IFS, the median income in 2021-22 will be 18 percent lower than it would have been had it continued to increase as it did in the decades before the crisis.

Pensioners’ incomes will rise twice as quickly as for the rest of the population in the next five years, but the poorest 15 percent of the country will see their incomes fall if planned benefit cuts go ahead, the IFS said. Low-income families with children will be particularly hard hit.

“The absolute poverty rate among children is projected to be roughly the same in 2021–22 as it was back in 2007–2008," said Andrew Hood, an IFS economist and an author of the report. "In the decade before that, it fell by a third."

The Treasury said the IFS analysis doesn’t include spending on education and skills or the full effect of tax measures that have increased contributions by the wealthiest.

“We are taking action to support families with the costs of living by cutting taxes for millions of working people, doubling free child care for nearly 400,000 working parents and introducing the National Living Wage, a significant pay rise for the lowest earners," the Treasury said in an emailed statement. “More people are now in work than ever before with living standards also forecast to rise over this Parliament.”

Inequality was thrust to the center of political debate in the U.K. after the vote to leave the European Union exposed a divided country where many people feel left behind. Real earnings in 2021 are on course to be below their level in 2008, the longest period of wage stagnation in at least 70 years, the IFS estimates.

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