Our forecast for household disposable income is built up by forecasting its components, which can be split into three main groups: labour income, taxes and benefits, and non-labour income:
- Labour income is made up of wages and salaries, and ‘mixed income’. Our forecast for wages and salaries is determined by our forecasts for average earnings growth and the number of employees. Mixed income is largely composed of self-employment income, which is derived from our forecasts of self-employment and whole economy average earnings.
- Most of our forecasts of net benefits and taxes – such as PAYE income tax, tax from self-assessment and social benefits – are taken directly from the relevant components of our fiscal forecast. These forecasts are affected by changes in policy and in many cases will depend on other elements of the economic forecast – our forecast of income tax, for example, will depend on our forecast for wage growth. Net benefits and taxes also includes a number of employee social contributions, such as our forecast of employee NICs that is also drawn from our fiscal forecast.
- Non-labour income includes interest receipts, interest payments, dividend income, household operating surplus, employee pension contributions, withdrawals of income from quasi-corporations (such as income withdrawn from the profits of partnerships by their owners) and miscellaneous transfers. These elements are forecast separately using a variety of approaches:
- Our forecasts for interest receipts and payments are determined by our forecasts for deposit rates, mortgage rates and the stocks of household assets and liabilities.
- Our forecast of employee pension contributions is largely determined by combining our forecasts of the gilt rate and closing pension liabilities, consistent with the measurement of this variable in the National Accounts, plus adjustments for the effects of relevant policies (such as auto-enrolment).
- Household operating surplus relates to the National Accounts concept of imputed rental, which represents an estimate of the housing services consumed by owner-occupiers. As this spending is imputed, the income side of the National Accounts also includes the imputed rental income. (Including both imputed flows means that the size of GDP is not affected by changes in the proportion of dwellings that are owner-occupied.) Household operating surplus is equal to imputed rental on owner occupied dwellings less the current expenses that go into the up-keep of those dwellings (such as certain repairs and interest costs). As this is largely estimated using data on actual rents, our forecast of this component is partly informed by the expected growth of actual rental income.
- Other elements, such as dividend income, withdrawals of income from ‘quasi-corporations’ and miscellaneous transfers are typically assumed to grow in line with other elements of income, such as wages and salaries or profits, with relevant items in our fiscal forecasts, or with nominal GDP. Dividend income rose as a share of household income in the decade before the pandemic, largely reflecting a significant increase in the number of people setting themselves up as single-director companies, rather than working as an unincorporated self-employed worker or an employee. We do not directly adjust our economy forecast for the effect of incorporations on dividend income, wages and salaries or mixed income. Instead, we factor this into our fiscal forecast, which allows us to capture the effects of incorporations on individual tax receipts more accurately – for example, the incentive to incorporate changes along the income distribution, which affects the size of the adjustment that needs to be made to our tax forecasts.
Real household disposable income (RHDI) is derived by deflating nominal household disposable income by the consumption deflator. In the March 2023 forecast, RHDI is expected to fall by 2.6 per cent in 2023, following a fall of 2.5 per cent in 2022. RHDI returns to growth in 2024, rising by 1.7 per cent as inflation eases significantly and falls below growth in nominal earnings and non-labour income.
We often also look at real household disposable income on a per person basis. This is a better measure of living standards as it strips out the effects of changes in the population size. On a fiscal-year basis, RHDI per person falls by 6 per cent between 2021-22 and 2023-24 taking it to its lowest level since 2014-15.
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