Are we better off than at the last election? It depends who’s setting the standards

If you want to know how well off you are, don’t ask a politician. Dominic Lipinski/PA Wire

In his budget, George Osborne stated that the average household is now enjoying higher living standards than in 2010. Labour disputes this, saying that this is the first election since the 1920s when living standards are lower than the previous one. These statements sound like polar opposites, but in fact, there is not a lot between them.

There are lots of ways of measuring household incomes. You can look at the average of what people earn or what they have as disposable income; you can look at means or medians; you can include all sources of income or just wage income. Naturally, each party chooses the measure that best suits them.

Pick a number…

Government figures tend to emphasise GDP per capita, which has risen very slightly according to the Office for Budget Responsibility. So has household income per head, if you include certain items such as imputed rent – the value of owning a home in which you live and can thus use free of charge, which is a kind of return on investment.

The Resolution Foundation – a think-tank which has done a lot of analysis of living standards – uses a slightly narrower measure that corresponds more with what people think of as their income. It has found that mean income has fallen by about 3%. The median has done better, but has still not quite regained its 2010 value.

Labour prefers to concentrate on average real (post-inflation) pay, which has fallen 8% since 2010. After years of pay freezes, or increases that fell behind inflation, it is only in the past year or so that people have started to get real-terms pay rises, so there remains a lot of ground to make up. There are all sorts of ways of looking at pay and earnings, including average weekly earnings, average hourly pay and what has happened to the pay of those who remain in the same job. Each produces a slightly different result.

Reality check

But these technical differences in measuring what has happened to real incomes should not obscure two underlying realities. The first is that, despite a recent upturn, the story of the past five years has indeed been unprecedented in the post-war period. Usually, income dips in a recession are short-lived, so real incomes rise significantly over any given five-year stretch.

The fact that we are arguing over whether we are slightly better off or slightly worse off than in 2010 shows that the normal promise of growth has not been fulfilled during this period. And there is enough variation around any average that, in a period during which there has been no significant household income growth overall, there will be plenty of people who have gone backwards.

The second is that many of the people who have gone backwards were badly off to start with. All the evidence is showing that fiscal austerity has hit the poorest the hardest. This is not surprising, since they depend the most on help from government. One indicator of this is how many people live in households with incomes below the minimum needed to reach a reasonable standard of living. My team’s research measures this standard after detailed consultation with the public over what that minimum should entail.

A quick explainer on living standards by the Resolution Foundation.

We have identified sharp and continuous increases in the number of households below that threshold between 2008/09 and 2012/13. Families with children have been hit the hardest: the numbers below the minimum standard in such households rose over that period from 31% to 39%. This does not pick up what has happened in the past two years, but there is no sign that for most of these families things have got any better.

I make this claim with confidence – even now that real earnings are starting to rise – because low income families with children face a particular claw-back of any improvement in their earned incomes. According to our research, their dependence on tax credits means that for each extra pound that they earn, they can lose 73p (and 76p under the new Universal Credit). This comes about because they pay more tax, while support is reduced with rising income.

This would matter less if the amount you could earn before claw-back kicks in rose in proportion with prices and earnings. But this level of “disregarded” earnings has been frozen. The consequence is that if you have a low income and children, you may have to wait a whole lot longer before you really feel that your living standard is rising – or even that it has stopped falling.