What the latest income and poverty stats could tell us - and what they can’t

Next week two new sets of UK income statistics will be released, covering 2020/21, but they won’t tell us much about our current situation. JRF’s Peter Matejic looks at why we need to be cautious when we interpret them.

If you’re going to be using this data, here’s the key things you should bear in mind:

  • Remember that the published numbers refer to the financial year 2020/21. This corresponds to the height of the pandemic when the economic environment and policy regime were very different (and more favourable in terms of the effects of key drivers and policies on poverty levels) than those currently seen. These figures say nothing about what is happening to poverty now.
  • Be very careful in drawing conclusions from the statistics about what actually happened in 2020/21 and where this fits into historic trends in living standards. Running major household surveys during the pandemic was extraordinarily difficult and the statistics producers have acknowledged that their results will be less reliable than normal and not fully comparable with previous years.

Why these releases do not say much about the current situation

Earlier this week we looked at how the Chancellor failed to act on the rapidly rising cost of living over the last year or so. In July 2021, inflation was spot on the Bank of England’s target rate of 2%. As of February 2022, it was more than three times this level and is expected by the Office for Budget Responsibility to peak in late 2022 at more than four times this level. A key driver of this is energy prices. In July 2021, Ofgem’s energy bill cap was less than £1,150 for a household paying by direct debit, from April 2022 it’s nearly £2,000, and is expected to rise further in October 2022. As well as the scale of the increases in the cost of living, it is worth noting how quickly these have occurred.

Next week we will have two releases*, both of which summarise incomes, inequality and living standards for the first pandemic year of April 2020 to March 2021 - before the effects of the rising cost of living on incomes. We at JRF would usually be eagerly awaiting these statistics, using them to try to draw out what they say might be happening now. The implicit assumption is if, say, child poverty has increased in the latest set of data, then that is a guide to what will have continued to happen up to the latest period, and so we would draw attention to the need for more action now. This year, this assumption breaks down for three key reasons:

1. The underlying economics of 2020/21 is nowhere near the same as at the start of 2022/23, as shown by the table below, adapted from our UK Poverty report published in January:

Summary of changes to drivers of poverty levels
Driver 2020 / 21 April 2022
Employment

Ambiguous:
Fairly large fall before recovery (still lower than pre-pandemic)

Improving:
OBR projections show rising employment

Earnings

Ambiguous:
Flat on average – protected by furlough

Ambiguous:
High increase in National Living Wage, but increases eaten away by high inflation and National Insurance rises - expect falling earnings in real terms on average

Benefits

Improving:
Increases (for some) - £20 uplift and Universal Credit increases for working families, but others left behind

Worsening:
High inflation means real-terms cut, out-of-work benefits at lowest level for 30 years following withdrawal of the uplift
Housing costs

Ambiguous:
Some protections introduced but these have now mostly been removed, rents increasing

Worsening:
Rents expected to continue to rise with mortgages increasing due to higher interest rates
Inflation

Ambiguous:
Overall, flat until mid-2021

Worsening:
Rates of inflation not seen for 30 years expected to persist. Massive energy price increases

Table key

  • GREEN: Improving – acting to reduce poverty
  • AMBER: Ambiguous – neutral effect, uncertain effect, or effects broadly cancelling out over a year
  • RED: Worsening – acting to increase poverty

There are a lot more ‘red’ drivers at the moment than there were in 2020/21, showing the general picture is worse now than then.

2. The policy framework of 2020/21 was radically different from previous years with massive temporary policies that mostly were withdrawn by October 2021. For example:

  • Almost nine million employments were being furloughed in early May 2020.
  • 2.9 million individuals received a Self-Employment Income Support Scheme grant over the life of the scheme, and 10.4 million total grants were claimed.
  • Around 5.5 million families in receipt of Universal Credit or Working Tax Credits lost the annual equivalent of £1,040 from November 2021 after receiving this additional amount since late March 2020.

Each of these will have had a large impact on the 2020/21 income distribution and none of these policies are currently in place. There were also further temporary social security system mitigations and housing market protections that are no longer in place that would also have a positive effect on the statistics published next week. Since then, almost all policy changes have been focussed on working families, whether through changes in the Universal Credit taper and Work Allowance, or raising the threshold for paying National Insurance.

3. Collecting accurate survey data from a large enough sample of people as the country locked down because of coronavirus was virtually impossible, and subsequent lockdowns will have affected response rates at various other times during 2020/21. This will have presented Government analysts with a dataset with fiendish problems not faced in any other years:

  • a smaller sample size which will be unbalanced, with a smaller proportion of interviews at the start of the year;
  • a move to telephone interviewing;
  • trying to capture newly introduced policies almost in real-time when questionnaires are normally fixed before the start of the survey year.

ONS have delayed publication of their ‘Household disposable income and inequality’ because further validation was needed, while the DWP say: "Due to the need for careful handling when presenting and interpreting data collected during the pandemic we have taken the decision not to publish the full range of breakdowns and supplementary tables."

What might the data say and what is happening to poverty now?

On page 20 of UK Poverty 2020/21, covering the period this data refers to, we said:

"Our assessment is that in the phase of maximum support, the proportion of people in relative poverty may have fallen. This is due to two complementary forces. The relative poverty line will be falling, as average incomes fall due to the labour market effects. At the same time, the incomes floor provided by the benefits system will be rising, with those benefitting from temporary increases in benefits somewhat counterbalanced by those falling into poverty through loss of income from employment."

There is a lot of uncertainty with this for all the reasons set out above, and we’ll describe what the data shows when it comes out.

The lack of detailed breakdowns outlined above will make unpicking what the data says happened in 2020/21 more difficult, especially in advance of the microdata becoming available around six weeks after publication. Before we get the chance to look at this, we may not be able to identify all the factors increasing or reducing poverty, or all the groups who have seen improving or worsening poverty.

In terms of the future, we said in January on page 14 of UK Poverty 2022:

"There is a potential for 2022/23 to be similar economically to 2019/20, with high employment and a growing National Living Wage (as well as more generous in-work Universal Credit rates) acting to reduce poverty, but with these positive effects being mitigated by historically low out-of-work benefit rates and historically high housing costs, and a new effect of high inflation. This would in turn continue the worrying trends of rising child and pensioner poverty, as the positive effects from the labour market are felt less for these groups, and workless households falling further from the often distant poverty line."

We think this remains a fair assessment, with if anything the prospects worsening since then, with a higher expected peak in inflation.

Confusion from publishing two sets of income statistics every year

It is worth making a final point about the fact we have two sets of overlapping statistics coming out within days of one another, which will inevitably be at least somewhat different in their findings. Usually there is a gap with the ONS statistics coming out in January, but the closeness in time of the releases brings into stark relief the potential for having two sets of inconsistent results from official data.

There have been a number of calls for better coherency in income statistics, including by JRF in January 2018 and most recently by the UK Statistics Authority in May 2021, which said: "DWP and ONS should determine the user need for a single data source on household incomes by exploring the feasibility of consolidating the existing social surveys."

There are some unique features in both the DWP (including the fact it contains poverty analysis) and ONS (including the fact it contains expenditure data and so can look at indirect taxes) data, but more needs to be done to prevent confusion here.

Notes:

*The Office for National Statistics publication ‘Household disposable income and inequality’ which has been pre-announced for publication on 28 March and the Department for Work and Pension’s publication ‘Households Below Average Income’ pre-announced for publication on 31 March.