Living standards - going down and, er, up

How, I pondered last night, can the chancellor be claiming that disposable incomes are rising, at a time when all agree that living standards have been squeezed as a result of wages failing to keep pace with inflation?

I think I now have the answer or, rather, the BBC's very brainy economics guru Stephanie Flanders has provided one.

George Osborne writes in The Times today that "disposable incomes grew by 1.4% above inflation last year despite the squeeze, the fastest for three years".

He is quoting the Office for National Statistics' measure of total real disposable household income.

The clue is in the name - it does not measure the experience of individuals or households or, even, the average.

It is a measure of how much the total of all households added together have left to spend after tax and benefits.

If the number of households is growing each year, which it is, or there are more people in work - and total employment did grow by several hundred thousand in 2012 - the total increases.

So, according to this statistic, household income is increasing.

But, she says, that does not really tell you what is happening to living standards; for that you need some measure of the average income of households, or real income per head.

The Institute for Fiscal Studies' figures (which suggested a squeeze in living standards of 3% a year) typically measure the average - or, more precisely, the median household income (that's the income of a household halfway through the income distribution).

This household data is measured differently, using a different survey. So it doesn't always match up with the number quoted by Mr Osborne.

Given the way that incomes are skewed, Stephanie surmises that it's quite possible for the median household income to be flat or falling even if total real disposable incomes (the ONS series) are going up.

But she points out that you don't actually need that 1.4% to be distributed unequally to get this effect: the average real disposable income for UK households will also have fallen in 2012, simply if the number of households grew by more than 1.4%.

Growth in the population is why real incomes - GDP per head - have even further to catch up with where they were before the crisis than the economy itself.

Our GDP is 3.3% below its peak. Our GDP per head is 5-6% below where it was at the start of 2008.

And that doesn't even take into account the higher taxes and cuts in benefits which have cut disposable income on top of that.

Now, this could be seen as just a bit of fun for like-minded statisticians and economists until you realise that this is politics and deadly serious.

Labour's best answer to the news of rising growth is to say that it is not reflected in increasing living standards.

The boys at the Treasury have worked hard to find a bit of data which blunts that charge ... a bit.

Nick Robinson Article written by Nick Robinson Nick Robinson Political editor

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