Budget 2013: Squeezed middle battles financial pain

At a children’s centre in north London, a group of new mothers are discussing their lives and finances with glum resignation.

These are not the poor. Most have decent, white collar jobs. Yet one woman, who gives her annual salary as £40,000, sums up the mood of the group when she says: “I’ve just seen my disposable income go down, down, down. State nursery places are saturated so you have to go private. Inflation, pay freezes; we’re just battling everything from all angles.”

This is the authentic voice of the “squeezed middle” and as Wednesday’s Budget showed it is a group no politician serious about re-election can afford to ignore. George Osborne mitigated his tough fiscal message with measures to help average earners, such as a freeze on fuel duty and a rise in the personal tax allowance.

Unheard of even five years ago, this swath of hard-pressed Britons has become a cultural trope: “the broad middle class who find themselves financially hard-pressed”, as Ed Miliband, Labour leader, has expressed it.

As those higher up the income scale reap the rewards of globalisation, those in the squeezed middle are struggling to defend their place in the economic pecking order in the face of rising bills, stagnating wages and dimming job prospects.

Westminster’s preoccupation with the members of this group is not hard to explain. Many are archetypal “floating voters” for whose allegiance politicians eagerly compete. “Nobody ‘owns’ the squeezed middle and they don’t belong to any one party,” says Ben Page, chief executive of MORI, the polling organisation.

An analysis by the Financial Times in 2011 – the same year that the phrase was sanctified by inclusion in the Oxford English Dictionary – concluded that the most “squeezed” Britons were public sector workers earning between £20,000 and £35,000.

But politicians have tended to use the term to embrace even those whose family income is far higher than this, but who feel their socioeconomic status is at risk as their purchasing power dwindles. Mr Miliband’s definition of the squeezed middle has sometimes seemed so broad as to encompass anyone who is neither on benefits nor earning a six-figure salary.

Mr Page suggests this inexactitude is no accident as politicians seek to strike a chord with a broad swath of voters. “If you are trying to pay school fees and a mortgage you might be feeling terribly squeezed even if you are in the top half of the income distribution,” he points out.

But perhaps more typical of the group are the skilled upper working, or lower middle, class – the C1s and C2s in pollsters’ parlance – whose “job in the call-centre just about makes them middle class but they are not from a family of doctors or dentists . . . so they are always anxious to hang on to their status”, says Mr Page.

The squeezed middle won’t feel less squeezed until their earnings stop going backwards

Although the squeezed middle is a relatively new addition to the lexicon, the forces behind it had been gathering pace, largely unremarked, for years. A Commission on Living Standards established by the Resolution Foundation, a think-tank, found that even in the years of economic boom, between 2003 and 2008, median wages flatlined, average disposable incomes fell in every English region and the price of basic foods and fuel, which consume a larger proportion of household finances for less well-off families, rose faster than overall inflation.

The numbers tell the story. Data released this week by the Office for National Statistics showed that between 2007-8 and 2010-11, after adjusting for inflation, the average disposable income for non-retired households in the middle fifth of the income distribution fell 3.8 per cent, from £31,100 a year to £29,900.

The hit to wages was due in part to workers receiving a shrinking share of the proceeds of growth, even as profits rose. Demography, too, played its part as national insurance contributions went up to pay for pensions and services for a growing number of elderly people.

The structure of the labour market was also shifting to the disadvantage of this group. People without a university degree were once able to make a reasonably well-remunerated living as bank tellers or secretaries.

But technological advances eliminated many such jobs. Those at the top, who possessed the skills needed in a globalised world, were able further to enhance their position. At the bottom, the demand for unskilled labour, such as home and office cleaners, whose jobs could not be automated, also held up relatively well.

In depth

UK Budget 2013

The Budget takes place against a troubling backdrop of persisting flat output and low confidence as the economy experiences its slowest recovery since the 19th century

These phenomena have helped to change the pattern of inequality since the turn of the century, says Steve Machin, research director at the London School of Economics’ Centre for Economic Performance. During the 1980s and 1990s, he says, both the top and the bottom of the earnings distribution “fell away from the middle”.

But in the 2000s, the position of those at the bottom of the earnings distribution has not worsened, while those at the very top have pulled further away from median earners. “That’s why you’ve got this kind of hollowing out of people in the middle,” adds Prof Machin.

Yet for years the full impact of this development was masked by the generosity of the welfare system which, under the Blair and Brown governments, shored up living standards for working families.

This week’s ONS data showed that, since the beginning of the downturn, cash benefits for the middle fifth of non-retired households have grown 26 per cent – a larger increase than that seen by any other income band.

But as austerity shrinks the welfare safety net, the search for ways to increase in-work income without relying on the state is becoming increasingly urgent, argues Gavin Kelly, chief executive of the Resolution Foundation, which focuses its research on people with a household income of roughly £12,000 to £40,000.

While the Budget’s promise of more help with childcare costs, the freeze on fuel duty and another increase in the tax threshold will go some way towards easing the financial pain of women like those at the London children’s centre, far more profound changes may be needed if they and their families are to benefit from the proceeds of a recovering economy.

Mr Kelly says ways must be found to bring more women and older workers into the labour market, to retrain those left behind by the march of technology and ensure wage growth is less skewed to the very top in future.

“The squeezed middle won’t feel less squeezed until their earnings stop going backwards . . . and you are not going to solve that fundamental problem through tax credits, however important they may be. You solve it through widely shared economic growth.”