Who did the Financial Crash affect and why? How was its effect felt across the demographic and income spectrum?
What went wrong?
Given the severity of the Recession in the United Kingdom, which saw a short-term reduction in Gross Domestic Product of over 6% (from the beginning of 2008 to mid-2009), some key socio-economic variables deteriorated. While the list of issues below is certainly not exhaustive, it paints a picture of continuing challenges in some key areas.
What happened next?
Employment and Productivity
Between 2006 (just before the crash) to 2012, the number of those employed in manufacturing (a key traditional employer) fell by 14%. While by 2012 the number of those in employment was 2% higher than in 2006 (indicating recovery to some extent), the 500,000 increase in the working population has largely been driven by growth in self-employment and an increase in the number of part-time workers of 700,000 people.
After the crash, the output (value of goods and services produced) per employee fell by 6.1% in comparison to the pre-recession trend. Furthermore, because of lower productivity, average annual growth in real hourly wages fell by 0.6%.
Taxes and Incomes
Restructuring the tax structure was a key objective of the Coalition’s economic ‘rebalancing’ act. In order to promote more investment and job creation, they lowered corporate tax rates, and personal tax rates for those in the upper income brackets from 50% to 45%.
During the period of the Labour government, real household disposable income grew by 2%/year on average over the course of 1996-2008.
In order to stimulate the economy, post-recession, the Bank of England lowered interest rates (starting in September 2008), which lowered incomes for those with savings. At the same time, tax-and-benefit changes led to mixed results depending on the type of household. Overall, median household incomes (before housing costs are factored in) dropped by 1.6% from 2008-2011, but by 2014 median income were back to the 2006 level (just before crisis).
In early 2007, before the crash, income inequality was slightly higher than 1997, when Labour came to power, and higher than any year since the 1950s (this was mainly due to incomes for those on the bottom end, the 2nd/3rd percentile falling, and high growth for the top earners, 98/99th percentile). However, while inequality has fallen post-recession across most income groups (mainly due to government benefits to lower income groups), the share of income going to the top 1% has risen from 5.7% to 8.3%.
Over the period 1995-2007, average home prices (in real-terms, accounting for inflation) rose three times. However, with the arrival of the recession, between 2007/08 to 2012 house prices fell by 25%, hurting homeowners. In terms of affordability, by 2014 home prices were almost seven times the level of average earnings, although this was still below the pre-recession peak of eight times average earnings. At the same time, rents increased putting a squeeze on lower income families.
Due to the severity of the recession, spending on social security (cash benefits and tax credits to citizens) as a proportion of national income rose from 11.2% in 2007/08 to 13.5% in 2009, due to a combination of increased benefits and lower national income. Eventually the Conservative/Lib Dem Coalition government reduced spending on social security by cutting welfare benefits.
Families with children
Spending (both total and per child) rose considerably from 1999. Households with children in the bottom tenth of the overall income distribution saw their net incomes increase by 20% due to changes to the tax (credit) and benefit regime between the 1997 to 2010 period. However, later changes executed over the 2010 to 2016 period reduced the net incomes of these families by 5% (as of 2014), as tax credits levelled off .
Over the post-war years, governments have striven to provide more universal coverage for pensioners, regardless of how much they had contributed during their working years. The Coalition government has gradually increased the state pension age: Women’s state pension age is gradually rising from 60 and will reach 65 by November 2018, and between October 2018 and October 2020, both men and women’s state pension age will increase to 66. Between 2026 and 2028, it will rise again to 67.
This is partly to spur private savings, and partly to take account of everyone living longer.
UK public health spending grew in real terms by an average of 1.3%/year between 2009 and 2015. Spending growth under the Coalition government was the lowest five-year average since records began. Spending is likely to increase considerably over the next 50 years, due to an ageing society.
What is the outlook?
It has been estimated that cuts the Conservative government had been planning, before the 2017 Election would have reduced the incomes of low income families. While existing claimants would have guaranteed protections, 1 million families with children, where there were no working parents would have been £3000/year worse off. It is currently unclear what position the Conservative government will take post-election.
In terms of income, according to the latest Institute for Fiscal Studies forecasts for this year, real median income is projected to grow by 3.8% between 2016/17 to 2021/22, while median income in 2021 will be 10% higher than in 2007/08 (this is a historically low growth standard).
The earnings growth is expected to benefit higher income households, and pensioners are also expected to fare better than other segments of the population. While the absolute rate of poverty is expected to decline slightly, child poverty is expected to rise from 27.5% to over 30%, and general income inequality is expected to widen.
However there are major debates currently on the future of economic policy across the political spectrum with the challenges of Brexit at the forefront.