Households could face another few tough years of squeezed budgets and low wage growth, official forecasts from the Office for Budget Responsibility suggest.
The figures were released alongside the Chancellor of the Exchequer’s Spring Statement, an update on the health of the economy and the government’s plans for the next few months.
Many of the top-line figures painted a picture of a strengthening economy, with GDP revised up to 1.7 per cent for last year, 1.5 per cent this and 1.3 per cent in 2019.
Real household income growth is expected to remain weak or fall in some years
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But while the Chancellor Philip Hammond said he was at his ‘most positively Tigger-like’ such was his excitement at improvements in the economy, the accompanying figures from the OBR suggested British families will continue to face challenges.
‘Our central forecast implies weak growth in real earnings and even weaker growth in real disposable incomes,’ the report said.
Real household disposable incomes grew by just 0.2 per cent last year, a similar rate to 2016. They’re expected to improve slightly by 0.6 per cent this year, but then fall slightly in 2019 and 2020, the forecasts from the Office for Budget Responsibility reveal.
Disposable income is what families have left over to spend once they have paid all the bills, including rent or mortgage payments and utility bills.
The predicted low growth in disposable income is due in part to a freeze in cash terms in most working-age welfare payments up to 2020, the OBR said.
The percentage of people’s earnings that they’re putting away for a rainy day has been falling
‘Net social benefits paid by government – which includes working-age benefits, state pensions and public sector pension payments – are expected to reduce growth in real household disposable income per person by an average of 0.2 percentage points between 2017 and 2020’, the report said.
Meanwhile, households have been putting away a smaller and smaller proportion of their incomes as savings since 2010, with a particularly sharp decline over the past two years.
Spending instead of saving has allowed households to keep their consumption levels up, even though incomes have barely risen and prices have increased overall since the Brexit referendum.
The debt to income ratio is forecast to rise, albeit by not as much as predicted in November
The OBR suggested that spending has stayed robust perhaps because households have taken some time to adjust their spending to take into account the weaker pound that has put up prices.
It predicts that growth in household consumption will continue to outpace growth in disposable incomes, especially since the cost of debt is at historically low levels and unemployment is relatively low.
However, it states that ‘the saving ratio cannot decline indefinitely’. ‘Over the medium term, we assume that the saving ratio stabilises and that consumption thereafter grows in line with disposable income,’ it says. In other words, eventually households will only be able to up their spending if their incomes increase.
House price inflation is set to moderate over the next few years
Changes in the income tax limits will mean that most workers should pay slightly less tax overall. From April, no tax will be payable on the first £11,850 of earnings for most workers – up from £11,500, while the higher rate tax band only kicks in at £45,351 – up from £45,001 this year.
However, few workers are likely to see their pay packets grow, because any increase will be far outweighed by the rise in pension contributions.
Real disposable income is expected to remain weak and fall in some years
Auto-enrolment is currently being rolled out into workplace pensions, ensuring that most workers are now paying into a workplace pension. The percentage paid by employees and employers is due to rise in April, which will mean that workers will be better off in the longer term as they will have put aside more for retirement.
But in the shorter term, many workers may start to feel the impact of eight per cent of their wages being diverted towards their pension saving.
Furthermore, the OBR says it assumes that employers will pass on 80 per cent of the additional cost through people’s earnings, which may also curb wage growth as the programme is rolled out.
House price growth, meanwhile, is expected to weaken from 2019 as mortgage rates increase faster than previously anticipated and strength in income growth reverses.
The OBR revised house price growth down to 3.1 per cent a year between 2017-18 and 2022-23, down 0.3 percentage points on its forecast in November.
While the slowdown may not be welcomed by homeowners, it should offer some relief to aspiring first-time buyers who have seen the first rung of the ladder move further and further out of sight in recent years as house prices rise on average.