Relieving the squeeze
Politicians, particularly of the Labour variety, are keen to demonstrate that they understand the concept of ‘Squeezed Britain’ but have been less forthcoming as to what a correct policy response might be. But there are some clues as to where an answer could lie from the update on the matter from the Resolution Foundation.
We now have quite a good grasp of the scale of the problem. There are around 10 million adults of working age, supporting a further five million children, who rely mainly on their wages to get by and have an annual household income, after tax and tax credits, averaging £21,000 a year. The Resolution Foundation calls this group the ‘Low to Middle Income’ households and defines them as the cohort in the national income distribution that lies above the benefit-reliant bottom 10 per cent and below the median income level. This group has seen their real wages fall since 2003 with little prospect of recovery at least to 2017 which is as far forward as the official forecasts go. The cost of living, meanwhile, is still going up: no wonder therefore that this group isn’t saving, can’t afford to buy property and so many believe that their children’s standard of living will be worse than their own.
Of these 10 million, those who have had the worst time of it in recent years have been men as they are disproportionately employed in the private sector, which was first hit by the recession. But with the public sector cuts now feeding through, this gender gap is expected to narrow. Neither will this cohort benefit particularly from the expected pick-up in the macroeconomy in 2013-14; the continued cuts to tax credits will counteract that.
So what is to be done? The first, and obvious, point is that these are not the scroungers, they are the strivers. It is possible to strive and be poor in today’s Britain. Ministers should be more nuanced about this. But no government will have the resources to reverse the tax credit cuts in any meaningful way; this is not a problem that can be solved in the foreseeable future by cash transfers. The solution instead lies in understanding to a greater extent what is happening to individuals within the group.
The main point to take away from the research by the Resolution Foundation is quite how dynamic Squeezed Britain is. Only 10 per cent of people who are currently officially ‘squeezed’ were in that category for each of the last 15 years. In any one year, around a third of people leave the group, of which two-thirds move up the income scale. People who move down are more likely to have children, not have a job or be a carer. Those who move up are more likely to have a degree, no children, a job and own property. Over a four-year period, around half of all working age people would find themselves in the LMI group for at least a year.
This dynamism gives hope. It shows that it can be normal to exit the squeezed part of Britain, and that targeted interventions at vulnerable times can make a big difference to outcomes. It points immediately to the importance of universal good quality, affordable childcare; the Resolution Foundation report explains how it currently makes no financial sense for a second earner in a middle-income family with two children under five to work full time. The number of free hours of preschooling available needs to keep rising; the payback is almost immediate. It also shows the importance of a relentless focus on skill levels of those in this group at all age levels: there is a clear correlation between education and skills and employment and wages. We know who the low earners are from their tax records. That information should be used to ensure each individual knows exactly what they need to do to raise their earning potential.
Finally, we know there are barriers to progression from the high cost of housing. Private sector social letting agencies, giving security to small landlords and cheaper rents to individuals, such as that advocated by the Labour group on the London assembly, are a possible way forward to free up a little more resources for households to put to more productive use. Frankly, the landlords have had a good time of it.
There is sometimes a tendency for those on the left to bewail the problem; now is the time to focus relentlessly on the individual solutions. The economic tide will turn. Getting the policy right will ensure it lifts the strivers at the bottom with it as well as those at the top.
Kitty Ussher is a research fellow at the Smith Institute and a former economic secretary to the Treasury. She writes the monthly Economy column on Progress and tweets @KittyUssher. You can see her own website here
economy, Labour, Resolution Foundation, squeezed middle