The Living Standards Outlook

• Context
• The study
• Key findings
• Points to consider

Context

The Resolution Foundation is an independent think-tank focused on improving living standards for those on low to middle incomes. The report aims to project how economic conditions will affect living standards in UK households from basepoint survey data from 2019-20 up to the year of publication (2022) and then up to 2026-27. The goal is to predict what disposable incomes of poorer or typical households might be and assess whether the UK is on track to become more, or less, equal. This is the fourth such annual report and was particularly important at the time as the UK started to recover from the COVID pandemic with an increase in GDP and low unemployment, while also entering into a deep downturn in living standards.

The study

The analysis takes survey data on UK households from DWP’s Family Resources Survey / Households Below Average Income, 2019-20 and initially uses recent economic indicators to project to the current date (a process known as nowcasting). The next step takes economic forecasts produced by the Bank of England and Office for Budget Responsibility (OBR), along with pre-announced or default changes to tax and benefit rates, to forecast to 2026-27. The aim of the Resolution Foundation in publishing this report is to inform public debate, alongside key decision makers in government, the private sector, and civil society, and to improve the lives of people with low to middle incomes by influencing decision making.

Key findings

• The conflict in Ukraine was expected to push peak inflation in 2022-23 above 8 per cent, leaving the typical real household income for non-pensioners 4 per cent – or £1,000 – lower than in 2021-22 – a fall of the scale only previously seen around recessions.
• Part of this living standards hit was expected to come from the policy of uprating benefits with a lagged measure of inflation: cutting the real value of the income provided by the benefits system by £10 billion in 2022-23.
• Real incomes were projected to also fall in 2023-24, by 2 per cent, driven by weak pay forecasts and the end of the Government’s energy bills support package.
• Real incomes were projected to be lower in 2026-27 than in 2021-22, with the period from 2019-20 to 2024-25 being on track to be the worst parliament on record for income growth.
• The most pronounced projected changes in relative poverty, absolute poverty and overall inequality were large falls in 2020-21 followed by large rebounds in 2021-22 as benefit boosts were withdrawn.
• The prevalence of absolute child poverty was projected to be higher in 2026-27 than in 2019-20, with a large rise between 2020-21 and 2022-23 even before considering the impact of the war in Ukraine.

Points to consider

• Methodological strengths/weaknesses: As with any attempt to predict the future, there are limitations on what can be done. The report acknowledges that there are many factors that influence household disposable incomes, and the authors are transparent about what has been included in the modelling, what has not been included, and why those decisions have been made. They also acknowledge that the analysis is based on survey data which also has flaws – biases and margins of error for example. The two main caveats the authors note are as follows: one, that the projections are based on the latest Bank / OBR forecasts at the time of writing, but that these forecasts will change, and two, that their predictions can’t be verified by later survey data. Instead they suggest that their work will act as useful indicators of what is happening to living standards and inequalities, far in advance of new survey data becoming available.
• Applicability: Of interest to anyone looking to understand how macroeconomic trends will affect low to middle income households, such as government, regulators, policy makers, financial institutions and support agencies.
• Relevance: Predictions only stay relevant when they are about the future: inevitably as this report ages it will become less relevant – although still of some interest as a way of understanding how successful those predictions about underlying economic predictions have been. The report will be superseded by the 2023 version.
• Generalisability: This report covers UK households with a particular focus on low to middle income households and applies only to this market.