by Kam Sandhu – @KamBass
In the second part of our interview with Giselle Cory – senior research and policy analyst from the Resolution Foundation, we talk about how long the economy will take to recover, and what support there is and should be for those on lower and middle incomes.
I think it was Danny Alexander who said that austerity needed to continue until 2020. How long do you think it will take for people to feel the economy has recovered?
“I couldn’t say a number, because there are too many uncertainties, but I will say a while. We did some modelling which looked at how incomes are likely to change over the next decade or so. And we saw that given the hit that incomes have taken, both from the components that are made from earnings from work – because of that very poor earnings growth I talked about earlier, and because of the hit that non-work income i.e. benefit income whether it be tax credits, child credit or out of work benefit, those have all taken a hit as well. So if you combine those two elements and layer on top the fact that we’ve had inflation running higher than growth in either of those things, you see that actually the pre-recession peak will not be reached again for at least another decade or so. So that’s looking like at least 10 years of families feeling like they’re not as well off as they were before the recession hit, and that’s a very long time for people to be holding on.
“About 40%, of people we asked said that they didn’t think the political parties were doing enough to support a rise in their living standards or mitigate the fall.”
“Another thing I will say is that households are fairly confident about what it is they think will help their living standards. In some recent polling we did, I think large majority, about 40%, of people we asked said that they didn’t think the political parties were doing enough to support a rise in their living standards or mitigate the fall, and we also asked what it was that any politician, irrespective of the colour of their party, could do to help their living standards improve again. The top things were reduce bills – so price rises we’ve seen on things like water, basic amenities, food has been fairly overwhelming for people who’s wages aren’t increasing. Second thing is cutting taxes for low to middle income people, so we’ve seen a certain degree of that in things like the personal tax allowance rise, but families want more of that. And the third is promoting wage increases through whatever economic policy they can and we’ve seen that has not been something we’ve seen in the last couple of years.”
The minimum wage has not kept up with inflation for some years and so, in a way it has eroded what the minimum wage is for. Despite the living wage being implemented by some companies and employers, there is plenty left to do. How important is it to re-instate the minimum wage, which is now pretty far behind the price rises over the years?
“As you say we’ve seen a dip in the real terms value of the minimum wage which as you say hasn’t kept up with inflation and the minimum wage is very important as a wage floor. And though a very small proportion of the workforce are actually on the minimum wage, a significant proportion are just above it – so hovering at the £6.50 – £7.50 sort of mark. So it’s important that the wage floor reflects the costs that families are having to face and it’s a fair increase, whether that means changing the way it’s set, whether that means indexing it to some other metric of growth so that we know it grows in parallel to some broader indicator of economic growth. I think the details of that need to be fleshed out and in fact, we’re looking into that at the moment with an expert group, to work out how it should be best looked into. But one thing’s for sure, too many people are trapped on those very low wages that are too low to make work pay. The living wage is an excellent pseudo-floor, a voluntary floor for organisations that sign up to it, but the problem with that is there are always limits to a what voluntary action can do rather than something that’s supported through legislation.”
What would you ask the government to do now, to help the economy and help those on low to middle incomes?
“How long do you have? I think the biggest area to target is around low pay, so it is reviewing how the minimum wage is set. It is reviewing how we can embed the living wage better, it’s understanding how we can influence the labour market, influencing the growth specific industries in the UK so there are more medium and high paid jobs. Because what we have seen is a hollowing out as such, of the labour market, where there’s jobs at the bottom and jobs at the top but the jobs in the middle are disappearing, and that’s based in large part due to technological change, but a lot of other factors as well. There are a lot of things the government can do to support growth of those jobs in the middle, and that will have a consequent effect on people at the bottom and the ability of people at the bottom to progress up and increase their wages – that’s one of many things you can do about low pay.
“Secondly, I’d say for low income families, the cost of childcare can be completely restrictive in terms of their ability to work so you see that a lot of families have to pay to work if they are on the lowest incomes, and that’s obviously a terrible work incentive. So the support for childcare should be increased so that no family has to face that decision.”
George Osbourne recently announced that he would give families £1200 of childcare for families earning up to £300,00 (if each parent earns £150,000). Will that help?
“The tax free voucher scheme, as you say £1200 per child, that will do some good for families who are eligible for it. However, though that goes very high up the income spectrum, it does not cover any family who is also receiving Universal Credit, and many low to middle income families with children will be receiving Universal Credit. For those families, they don’t benefit from the voucher scheme, which is equivalent to £1.5 billion worth of spending because it’s £750 million new money and £740 million old money that they’re taking from another scheme that’s being shut down.
“They don’t benefit from any of that £1.5 billion, but at the same time they are the earners who are on the lowest wages and therefore face the highest barrier to income because their wages simply can’t absorb heir childcare costs. So I think a much better way to spend the money, is to make sure the people who can be persuaded into work and can be helped into work – because a lot will say ‘I want to but childcare is a barrier’ – is that we focus whatever funds we can on childcare on these families, because it’s firstly, unlikely that higher income families would change their decision about work based on that support, and secondly, it’s unlikely that a large proportion of their income would be taken up by childcare. So we’re not changing their lives much. We’re helping them a little bit, but the life changing stuff is for the people on low incomes. The government have proposed £200 million of extra childcare for this group, but the problem is that £200 million doesn’t really go far enough. You either have to target a specific sub-group or everyone and it’s spread out amongst everyone and you lessen it’s bite significantly.
“And in terms of your other question on what else do we do for this group, the other two big areas I talk about is prices. So as you said, this group faces costs higher than their wage increases, and they also face more severe levels of inflation than higher income people because what we know about low and middle income people is they spend a large proportion of their income on essentials and unfortunately it’s these essentials that have experienced the highest price increase. So they are effectively spending a large chunk of their money, and an increasing chunk, on things they can’t afford like they used to whilst their wages aren’t going up. So attempting to address things like rising water prices and energy prices is going to help this group a lot.
“In a vast majority of local authorities, you simply can’t afford private rented sector housing if you want to spend less than 35% of your income on housing, which is seen as the affordability definition. In a third of local authorities, private rented accommodation costs around a half of your income.”
“And the other area, that I think is dear to all of us, is housing. And we’re sitting in London, so it’s not news to anyone that housing is unaffordable but actually across the country it’s very difficult for people to get into housing. We’ve got three main types of housing in the UK. So you can own, you can rent or you can be in social rent – own, private rent or social rent. What we find with low to middle income people, they can’t own in most part because they can’t drum up the deposit, it’s a lot of money particularly in post-recession, and the ongoing costs of that mortgage would be quite demanding in comparison to the wages they receive. They can’t access social housing because they are not perceived to be vulnerable enough and stocks aren’t what they need to be. So they’re increasingly in the middle, in the private rented sector, which isn’t in itself a problem. However, given that rents in many areas absorb very high proportions of people’s income, given that renting doesn’t allow people the security of tenure that they’d like, particularly if you’ve just put your young child in school and you don’t want to have to move them out of school because your landlord puts your rent up. Private rented tenants also can’t make their house a home, people want to be able to put a picture up, paint a wall, so a lot of families don’t feel particularly comfortable in that sector, but don’t have a choice. So addressing the overall affordability of housing but also low and middle income families’ access to ownership, whether that be through shared ownership schemes, where you buy a bit and rent a bit, or full ownership is very important, and on the top of the priority list for a lot of low income people.”
Boris Johnson recently said that he was setting affordability at 80% of the private sector. What do you think about that figure?
“It’s very high. We’ve looked at affordability of different tenure types and found that social rents, as they are, are bordering on the unaffordable already, so to look at affordable rent as 80% of private rent is pushing that rent way above current social rents, much closer to market rents, which we know at the moment are unaffordable. In a vast majority of local authorities, you simply can’t afford private rented sector housing if you want to spend less than 35% of your income on housing, which is seen as the affordability definition. In a third of local authorities, private rented accommodation costs around a half of your income. By anyone’s standards that’s a lot of money to pay, so if we’re pushing affordable rents up to that limit it’s simply going to be very, very difficult for families that can’t sustain that level of housing expenditure and as I mentioned before, they don’t have any choice. There’s no other options for them. So I think a lot of people are going to find it very tough.”