IFS warns of lost decade in wage growth

 
Tim Wallace
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INCOMES will be lower in 2016 than they were in 2006, the Institute for Fiscal Studies warned yesterday, following the downgraded economic growth forecasts.

The sharpest drop is expected to come in the three years from 2009 to 2012, with real household disposable income declining by 4.7 per cent over the period – a record drop.

A combination of high inflation, low wage growth and rising unemployment are largely behind the decline.

Over the ten-year period, wages grew very little in the period before the recession, whilst the recovery since has been very slow.

Those at the top of the income distribution will also be affected as returns on investment incomes have been affected – both as stock markets perform poorly and interest rates remain at historic lows.

The IFS also highlighted the lower trend rate of growth estimated by the OBR in its latest report.

Potential GDP in 2016 has been cut by 3.5 per cent as the UK has the capacity to grow less quickly than was thought in March, the OBR reported.

However, the figures were also cut in March from the previous estimate in 2010.

Together, these reduce the potential size of the economy by around 13 per cent – a permanent loss to economic potential. This leaves a hole of £114bn, not the £91bn previously assumed, in the chancellor’s finances, the IFS said.