Britain's 'Squeezed Middle' defined: 11 million facing a triple crunch

A new report exposes what the UK's working but not well off millions are up against - a triple beating.
Brian Landers
28 November 2010

The Resolution Foundation is a think tank focusing on what it calls LMEs, low-to-middle-earners, those who in the Foundation's words are “too poor to be able to benefit from the full range of opportunities provided by private markets, but too rich to qualify for substantial state support.” It defines LMEs as the 40% of the working-age population whose incomes are not in the bottom 10% of the “benefit reliant” nor in the top 50% of “high earners”. At first sight that seems a very odd way to stratify society but the Foundation's latest report Squeezed Britain (pdf) makes fascinating reading.

The Foundation has identified a group of over 11 million adults who seem to have fallen off the political radar. They are not the near-destitute for whom the government regularly if ineffectively promises to provide a safety net but nor are they the friends of Lord Young celebrating their shrinking mortgage repayments and not noticing any recession. Put another way they are neither the victims of the Housing Benefit cuts about whom Labour have had so much to say nor are they the middle class families bemoaning their loss of Child Benefit whom the Conservatives are afraid of losing.

The LMEs are somewhere in the middle and the report shows that is not a very nice place to be. Compared with those below them the LMEs are more likely to have jobs to lose and mortgage payments to maintain while compared to higher earners they are more likely to face unemployment and underemployment, less likely to return to work quickly and much less likely to have access to safety nets in the form of savings, insurance and redundancy payments.

These are households typically with a gross income of under £30,000 for whom every penny counts. Money is not going on luxuries. For example 43% of LME families reported that they did not spend a week or more away from home with their children last year, compared with only 15% for high earners. 40% of LME household spending was on housing, fuel, transport and food – categories that are hard to reduce - compared to just 26 per cent among higher earners. If Lord Young ever spoke to people like these he would soon discover that the recession is real. Add in a regressive tax increase like the forthcoming increase in VAT and the position can only get worse.

It is a simple fact that a market economy exacerbates the impact of lower incomes. Retail offers of three for the price of two don't benefit those who can only afford one (see Our Kingdom). This report offers yet more evidence. For example it shows that inflation is a bigger issue for the less well off. Comparing prices in January 2000 and January 2009, the cost of the typical LME basket had increased by 18 per cent; in contrast, the typical higher earner basket increased by 16 per cent. As such, LME purchasing power was around £300 a year lower than it would have been if the group had been subject to the same cumulative level of inflation over this period as higher earners.

The reports key findings are simple: this group are hurting and will be hurting a lot more soon. Due to falling real wages LME households are likely be £720 poorer in 2012 than they were in 2009. And on top of that, along with the “benefit-reliant”, they are bound to be much harder hit by the cuts in the provision of public services than the richer half of the population. Essentially LMEs are facing what the report calls a 'triple crunch':

  • An earnings crunch – driven by unemployment and cuts in working hours in the public sector and by weak labour market recovery in the private sector
  • A cost of living crunch – driven by permanent global pressures on the cost of essential items such as food and fuel, by the forthcoming VAT increase, by increases in the costs of public transport, by the continued shortage of suitable housing supply and by the likely introduction of higher user-charges for a number of public services.
  • A tax-benefit crunch – driven by withdrawal of various forms of financial support for working families, particularly tax credits.

This last point is crucial.  The way the report defines LMEs means that most of those with means-tested benefits are excluded from the category and a major reason that politicians seem to have have ignored these people may well be that they don't think that the cuts to the welfare state will impact them. But LMEs are the major recipients of tax credits. In 2008-09, 30 per cent of LME families received tax credit awards, compared with 25 per cent of benefit-reliant families and 10 per cent of higher earners. They will be hit hardest when these credits are cut, cuts which in monetary terms will be bigger than the changes in either Housing Benefits or Child Benefit. When that happens perhaps the plight of the LMEs will suddenly come under the spotlight (although surely someone will have to invent a more euphonious term than “LMEs”).

The report provides an enormous amount of data (and the technical annex in chapter 8 is not for the feint hearted) but the narrative itself is is unusually well written. It should be required reading for all politicians. And yet there is something missing: answers. The report's conclusion is that 11 million people in Britain are facing a triple crunch. That tells us where our current route is taking us, it doesn't tell us much about where we actually want to go. Hopefully the authors will be tackling that subject next.

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