Middle-Income Earners Face Dim Economic Outlook as Child Poverty Risks Rise, Resolution Foundation Warns

Middle-income families face bleak economic prospects, think tank cautions

According to a report by the Resolution Foundation, an additional 400,000 children may slip into poverty during the current parliamentary term.

Business correspondent for Sky News Business

Thursday, August 29, 2024, 2:

The forecast for the quality of life for middle-income earners appears "poor" after this fiscal year, as stated in an annual study by a thinktank published before the Labour government's inaugural budget.

The Resolution Foundation cautioned that a deceleration in wage increases universally is likely to become more noticeable by the time Sir Keir Starmer celebrates his first year in office, pointing out that soon, escalating housing expenses will surpass the rate of pay rises.

The report, published shortly after Labour's overwhelming victory at the polls, drew on projections from the Bank of England and the Office for Budget Responsibility.

The report indicated that those in lower income brackets would be most affected, particularly if the government chooses to proceed with the proposed Conservative reductions in welfare benefits, since a larger portion of their earnings is allocated to expenses such as housing and utilities.

The organization reported that an additional 400,000 children could fall below the poverty threshold during this parliamentary term if no action is taken, partly because of persistently high interest rates aimed at controlling inflation amidst the escalating cost of living crisis.

Wage increases are considered a risk for inflation, which is why interest rates are not decreasing more quickly.

The Bank hopes for a slowdown in wage hikes, whereas the government, aiming to prevent greater economic hardship for individuals, prefers otherwise.

This situation presents a significant concern for the Labour government, especially as they have taken on what they describe as a £22 billion deficit in public funding, which they attribute to the previous Conservative government.

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The administration cited this gap as the reason for its initial move to eliminate winter fuel allowances for the 10 million retirees who do not receive benefits.

Sir Keir and his finance chief Rachel Reeves have signaled more difficult decisions to come in the upcoming budget on October 30, with the prime minister acknowledging earlier in the week that challenging days are on the horizon.

He declared that those who are most capable will need to shoulder the major impact of the impending tax increases. In response, the Tories have countered by saying that the budget will spell a nightmare for the middle classes come Halloween.

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Labour has dismissed the possibility of increasing VAT, national insurance, and income tax rates.

The report from the foundation indicates that while incomes are projected to rise by 3% in 2024/25, the average yearly income growth for households without pensioners is anticipated to drop significantly to 0.4% from 2024/25 to 2029/30.

This would result in an average annual income increase of 0.8% throughout the term of the parliament, equivalent to £1,400 for each household.

The economic analysis recommended an increase in the real yearly wage growth by one percentage point starting from the fiscal year 2025/26, aiming to elevate the average income growth for households without pensioners to 8% by the conclusion of the parliamentary term, a rise from the current 5%.

The report suggests that eliminating the cap on universal credit for families with more than two children and increasing the local housing allowance starting in 2025 could instantly remove 600,000 children from poverty, with an estimated expense of £3.5 billion.

The administration has resisted calls from its own members of parliament to eliminate the two-child limit on benefits.

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A third suggestion involved increasing working-age benefits based on wage rates instead of price levels starting in 2025.

The research indicated an annual expenditure of approximately £9 billion by the conclusion of the parliamentary term, which would maintain child poverty rates at a lower rate compared to the previous session.

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Economist Alex Clegg stated, "Britain is witnessing a slight improvement in living standards at the moment, as inflation decreases while wage increases continue to be substantial."

"However, this trend is not expected to continue, as most of the increase in income is anticipated to occur within this year alone during the parliamentary term."

He continued, "The situation looks grim for middle-income families, but it's dire for those in poverty, with 400,000 children facing the threat of descending into poverty."

"This concerning forecast underscores the urgency for the incoming administration to outperform the projections they have taken on."

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