Gains from Growth to bypass much of working Britain without bold action

Millions of households are heading for a long period of stagnant living standards unless bold steps are taken to ensure that growth over the next decade is broadly shared, according to a landmark investigation into the squeeze on incomes. Even with a return to steady growth, it’s now entirely possible living standards for a large swath of low and middle households will be no higher by 2020 than they were in 2000. Yet actions can be taken to alter this course.

The findings are contained in the final report of the Commission on Living Standards, a broad group of leading employers, trade unionists, economists and heads of parents’ groups brought together by the independent think-tank the Resolution Foundation. The report sets out for the first time the full explanation for the challenge now facing low to middle income households, the risk that the benefits of a period of growth could bypass millions of working households, and key recommendations on how to avoid this.

THE CHALLENGE

The Commission finds that, compared to previous decades, there is a greater risk that the gains from future growth may fail to reach low to middle income families:

1. New technology and globalisation is leading to a hollowing out of middle-income jobs, leaving millions struggling to access high-paid, high-skill jobs, or at risk of falling into the growing number of low-paid service jobs. The report shows that in the current decade (2010-20), 2 million senior and professional jobs are expected to be created along with 400,000 basic service and elementary jobs. Meanwhile 800,000 mid-level admin and manufacturing jobs look set to be lost

2. Female employment and older workers have played a central role in raising family incomes but the UK underperforms on both fronts: as many as 1 million women are missing from the UK workplace compared to better performing countries, and we are falling down the international league table for employment of older workers

3. The long-term fiscal crunch means that tax credits, which played a crucial role in lifting living standards for millions of families before 2008, won’t perform the same role again regardless of who is in power after 2015. Tax credits and benefits added on average £730 a year for low to middle income households from 2003 to 2008 while other income sources fell by £570, resulting in anaemic overall income growth of £160. State support is now set to fall

4. Real wages are now significantly more sensitive to unemployment than in previous decades, meaning that unemployment may have to fall to very low levels before we can expect sustained pay rises. This increased drag of unemployment on wages worsened the recent squeeze on typical pay by around £2,000 a year

The result is that on current trends the outlook for the bottom half of the working population is bleak even once growth returns. However the Commission also finds that this stagnation of living standards can be averted if action is taken. Its analysis shows that success in boosting low pay, raising skills, and increasing female employment could see a typical middle income family better off by £1,600 (after inflation) a year by 2020. Trends in living standards are stubborn but can be altered.

RECOMMENDATIONS

The report sets out a comprehensive agenda to ensure that growth feeds through into rising prosperity for those on low to middle incomes, with recommendations spanning low pay, improving employment levels and reform of the tax and benefit system. The report is clear that future improvements in living standards will have to come from higher employment and pay rather than rising state support.

First, to boost employment among key groups, the report proposes:

Expanding the provision of affordable childcare, recommending that the government:

1. Increase the current free 15 hours of childcare for three and four year olds and disadvantaged two year olds to 25 hours a week and for 47 weeks a year (compared to the current 38 weeks), charging the extra 10 hours each week at £1 an hour. This would mean parents of young children would benefit from the equivalent of three days of childcare a week for just £10

Make work more attractive for low and middle earning older workers:

2. Reduce taxes for low-paid older workers by raising the threshold for National Insurance Contributions (NICs) for over-55s from £7,500 to £10,000. This would raise the income of lower-paid older workers, lifting 160,000 out of NICs altogether and cutting the NICs paid by a full-time older worker on the minimum wage by two-thirds. Because people become more sensitive to financial incentives as they near retirement, this would help to boost employment

Make the benefit and tax system do more to support employment as well as reduce the burden of unfair taxes:

3. Make Universal Credit friendly to second earners (overwhelmingly women) by treating them as generously as (mostly male) first earners. Under current government plans, a low paid second earner will face an effective tax rate of 65 percent from the first pound they earn. Under the Commission’s proposals, a second earner would be able to earn around £2,000 before Universal Credit starts to be withdrawn

4. Increase child tax credit for parents of pre-school children and reduce it for parents of older children (revenue neutral overall). This recognises that parents tend to want to return to work as children get older

5. Cut council tax bills for lower value properties by introducing several new bands for the highest value properties

Second, the report recommends a major drive to boost low pay without putting employment at risk

It recommends that the government:

1. Expand the powers of the Low Pay Commission, which oversees the National Minimum Wage, to address low pay more generally. This would involve it assessing the wage rate that each of the main sectors could afford to pay above the legal national minimum – a non-mandatory “affordable wage” – without risking employment loss. It would also have a wider role in advising government on further steps necessary to reduce low pay over the longer-term

2. Force pay transparency about low pay by requiring publicly-listed firms to publish the proportion of their staff paid below the Living Wage

To improve prospects for pay and progression over the longer term the Commission proposes that:

3. The English education system should focus on qualifications at 18, helping more young people to compete with graduates for good jobs. This would include, over time, introducing a standard school-leaving exam at 18 in line with other leading economies. All young people should be required to study English and Maths to the age of 18 if they have not achieved a good standards (A-C grade at GCSE) by the age of 16

Each of the Commission’s recommendations is carefully costed and fully funded by a mix of spending reductions and highly targeted revenue-raisers. There are three main sources of funding:

4. Tighten the highly generous tax-relief for the most affluent which currently allows them to build up tax-privileged pension pots of £1.5 million. The Commission recommends that this life-time limit be restricted to £1 million. The typical private pension pot used to be an annuity on retirement is just £26,000

5. Means test free universal winter fuel allowance and television licences for pensioners, raising £1.4 billion

6. Extend National Insurance Contributions to those working beyond the state pension age, raising £800m

Clive Cowdery, Commissioner and Chairman of the Resolution Foundation, said: “For all of today’s important arguments about growth and recovery, there remains far too little debate about whether growth will benefit the broad majority of people. Our work suggests this will not happen automatically but also that, even in a tight fiscal climate, things can be done to ensure the benefits of
economic growth are shared by all.”

Ben Page, Commissioner and Chief Executive of ipsos MORI, said: “With millions of households seeing falling real incomes, and a real risk that many “strivers” will see little improvement even when recovery happens, this report is a thoughtful set of suggestions on what politicians can do to avoid middle income households in Britain from suffering a long term stagnation in living standards, and avoid punishment at elections.”

Frances O’Grady, Commissioner and General Secretary-Designate of the TUC, said: “Britain has found itself locked in a destructive and costly cycle of low pay and underinvestment in skills. Breaking out of this cycle will require the kinds of new approaches that we outline in this report. That must include new ways of encouraging companies to pay more when they can afford to.”

Sir Win Bischoff, Commissioner and Chairman of Lloyds Bank, said: “These are difficult times for the UK economy and the first priority is to secure a return to growth. But for long-term sustainability we must also ensure that growth is built on the solid foundations of rising real wages through productivity increases and higher employment across the working population rather than rising debt and state support. That will require widespread improvements in skills, stronger work incentives, and an efficient tax and benefit system. All of this is required if we are to ensure that the benefits of growth are widely shared.”

Paul Johnson, Commissioner and Director of the Institute for Fiscal Studies, said: “In the current fiscal climate, further growth in living standards will need to come from employment income rather than direct state support. The tax and spending switches we set out in this report show that, even within existing fiscal constraints, steps can be taken that will help support living standards. We must ensure that our tax and benefit system does more to boost employment.”

Sally Russell, Commissioner and Director of Netmums, said: “Much of the rise in living standards in the past 40 years came from more women working. These personal choices are now being curtailed by the very high cost of childcare, which is stopping many women from returning to work or forcing them into lower-skilled, part-time roles, meaning families cannot increase their incomes. The extra support for childcare that we recommend would help to ensure that work pays for parents.”

Phil Bentley, Commissioner and Managing Director of British Gas, said: “Every year, British Gas spends millions of pounds equipping thousands of apprentices with practical skills, giving them a career for life. But we’re the exception and not the rule. We need more companies providing opportunities beyond typical graduate employment routes. As well as raising living standards, it makes perfect business sense.”

The Resolution Foundation Commission on Living Standards was set up in early 2010 as an independent and wide-ranging investigation into the pressures facing people on low to middle incomes in modern Britain.

Article courtesy of the Resolution Foundation