What income do people need to achieve a socially acceptable standard of living in 2013?
This year's updated figures show a continuing squeeze on incomes relative to rising costs, only partly alleviated by increased tax allowances.
Updated annually, MIS shows us the cost of items and activities the public think we all need for a decent standard of living. It also calculates the earnings required to enable different household types to achieve this living standard.
Find out more at www.jrf.org.uk/mis
This question is crucial when rising prices and stagnant incomes are creating unprecedented erosion of household living standards.
Since 2008, JRF has published annual updates of the minimum income standard (MIS) for the UK, to reflect changes in costs and living standards. The standard is based on asking members of the public to identify the items and services a household would require to reach a minimum acceptable standard of living, covering essential needs and allowing household members to participate in society. MIS is a unique way to assess at what point tougher times prevent households from living at a socially acceptable level. New research on minimum baskets is carried out every two years, but in 2013 the MIS update was based on inflation and changes in tax and benefit entitlements.
In the year to April 2013, the cost of minimum budgets for various households rose by between 3.3 and 4.2 per cent. This was more than the Government’s preferred inflation measure, the Consumer Prices Index (CPI), which rose by 2.4 per cent. Since the launch of MIS five years ago, the cost of the basket of essential goods and services has risen by nearly 25 per cent, compared with 17 per cent for CPI (see Figure 1). Over ten years, the minimum basket has become 45 per cent more expensive, compared with a 30 per cent increase in CPI. Recent higher-than-average increases in the cost of items such as food and public transport, which are more strongly represented in MIS budgets than in the CPI, account for these differences. Rapidly rising social rents and childcare fees have also contributed to increases in the minimum cost of living.
Figure 1: Inflation over one year and over five years to April 2013 (click for a larger version)
The rising cost of achieving a minimum living standard is compounded by household incomes increasing more slowly than CPI. Average earnings have barely changed over the past year, rising only 0.4 per cent between the first quarters of 2012 and 2013. Working-age benefits and tax credits, which until now were mostly linked to CPI, rose in general by only 1 per cent to April 2013 (and Child Benefit remains frozen). In short, minimum spending requirements have risen by around 4 per cent, but wages and benefits by only 1 per cent or less.
Table 1 shows revised MIS budgets for April 2013, alongside key comparisons (click for a larger version):
For non-working families of working age, benefits provide too little to reach an acceptable living standard as defined by MIS. Benefits provide enough for pensioners if those on low incomes claim Pension Credit. Adequacy of benefits has declined substantially in the past five years, especially for lone parents, who can now afford only 57 per cent of MIS, compared with 68 per cent in 2008.
For most households in work, pay rates required to reach MIS remain well above the National Minimum Wage, currently £6.19 an hour, equivalent to just over £12,000 a year for someone in fulltime work. A single person now needs to earn £16,850 a year before tax to reach an adequate living standard as defined by MIS. Families with children, helped by tax credits, get closer to MIS on low wages than single people. However, since tax credits are withdrawn rapidly as earnings rise, working families with children need higher earnings to raise their incomes to the minimum level, compared with households without children.
Changes in income tax and tax credits affect how much households need to earn to reach what the public think is an adequate living standard. For all working households, the large increase in personal tax allowance in 2013 has lowered this amount. However, this gain is offset by the above-inflation rise in the cost of a minimum basket and, for families with children, by a real-terms cut in tax credits. A single person needs to earn 2.9 per cent more than a year ago to make ends meet, while a couple with two children need 5.5 per cent more.
The squeeze in living standards caused by the combination of rising prices and stagnant incomes continues to hit people on low incomes hard. Over the past five years, the spending needed to reach an acceptable living standard according to MIS has risen by a quarter or more for various households, while earnings have hardly risen at all. During this period, real-terms cuts in benefits and tax credits have exacerbated the squeeze. This has been offset to only a small degree by increases in tax allowances enabling households to keep more of what they earn. Families with children have had the greatest setbacks in terms of earning enough to make ends meet, since they rely most on the state support that is now being cut back.