Income stats: has Osborne done it?

The highly regarded Institute of Fiscal Studies (IFS) has just published a report, Living standards: recent trends and future challenges, which is already adding some spice to the economic debate in the forthcoming General Election. According to the report, real (inflation-adjusted) median household income in 2014-15 is estimated to have risen by 1.1 per cent, taking it back to where it was before the recession in 2007-08.

Taken at face value, the political responses have been predictable. George Osborne, the Chancellor, said that the report marked a "major milestone in our recovery". The Government will make every effort between now and the election to persuade people that although the recovery in living standards since the financial crisis has been slow, it is now irrefutable and projected to become more robust.

Chris Leslie, Labour’s shadow Chief Secretary to the Treasury, focused on the tepid pace of recovery, which he blamed on the Government. Cathy Jamieson, Labour’s shadow Economic Secretary to the Treasury, picked up on the IFS finding that real median incomes in 2014-15 were estimated to be 2 per cent lower than the peak in 2009-10, and that the recovery has left most people worse off.

So what should you make of the IFS report? Well, it all depends on your perception.

As highlighted above, the first point is whether you want to compare the IFS projection with the level in 2007-08, or just before the crisis-induced plunge began in 2009-10.

Second, although the IFS data is credible, living standards is a notoriously contentious subject. Labour likes to use wages, not total incomes as its preferred measure of living standards and these are still at low levels, if now rising slowly. Further, whether one measures housing expenses (which have soared), and how one measures inflation make a big difference to the outcome. It is easy to come up with a worse picture than the IFS has painted.

Third, your perception may be further influenced by whether you’re a high or a low earner, and how old you are. The IFS says higher earning households have experienced the largest falls in income because tax and benefit changes have benefitted other income cohorts. On the other hand, low income earners have unquestionably faced higher food and energy price inflation—at least until the recent bust in oil and commodity prices. So this impact may now be reversing. And the over-60s have seen rising real incomes, compared with falls experienced by those aged 31-59, and especially even younger adults aged 22-30.

Fourth, we should expect a lively political debate about what has happened to real incomes since the late 2000s, especially compared with what happened after previous recessions.

Labour will make capital out of the IFS data showing that in the first three years of recovery after the 1981/82 and 1990/91 recessions, median income rose by 9.2 per cent and 5.1 per cent, respectively. Needless to say, these income surges compared with the 2 per cent rise since 2011/12, fueled a much stronger consumption and feel-good environment. No one can argue that this recovery hasn’t been disappointing.

At the same time, no one can argue that the comparison with past recoveries is relevant. After the worst financial crisis since the 1930s and the resulting eruption in public debt, unrivaled in peace time, a slow and hesitant recovery was always going to happen. Indeed, the recovery is still a work-in-progress and may not be over for several years yet. This will hardly figure as a political selling point for the Government, which will have to appeal to the electorate on the basis that progress to restore living standards is being made and that the proverbial medicine is working.

The election debate will cause economic data on living standards to fly backwards and forwards without a clear conclusion. In the end, it will probably come down to how we all feel about the economy, and the quality of economic management in the two major parties now and prospectively. In short, the momentum analogy is apposite. Regardless of what the statistics say or measure, on economic grounds at least, it looks as though this recovery has come just in time for the Government.