By Lalitha Try, Economist at the Resolution Foundation
Following the General Election, living standards growth must be on the agenda for the new government. This is because the combination of sluggish economic growth and repeated economic shocks have meant that since 2010, typical household incomes have only grown by £140 a year.
New Resolution Foundation research, funded by the Nuffield Foundation, has explored how living standards have changed over the last Parliament and since 2010. Income growth in the UK has been particularly weak between 2009-10 and 2023-24, with typical non-pensioner household incomes growing by just £1,900 over the period, or £140 a year. This level of income growth is weak by historical standards: in the previous 14-year period (from 1995-96 to 2009-10), incomes grew by 38 per cent, compared to a much lower 7 per cent between 2009-10 and 2023-24. This level of growth is also weak by international standards: had we had the same level of growth in typical incomes between 2007 and 2022 as the Netherlands, France and Germany did, our typical incomes would have been £2,700 higher by now.
Some good news is that during this period of living standards stagnation, poorer households have benefitted from the strongest income growth. From 2009-10 to 2023-24, the poorest fifth of households’ incomes grew by 13 per cent, while typical households’ grew by 7 per cent and the richest fifth’s grew by 2 per cent.
What’s caused poorer households to have the strongest income growth? The main driver is an increase in employment among lower-income households, especially when compared to the high unemployment rate in 2009-10. This increase in employment has led to an increase in earnings for low-income households: increases in pre-tax employment income boosted incomes by 20 per cent for the poorest 30 per cent of the population. In addition, the introduction of the National Living Wage has boosted wage growth for low-paid workers.
But this increase in income from employment has been counteracted by tax and benefit changes. Since 2010, tax and benefit policy decisions have been regressive, dragging down the incomes of low-income households and boosting the incomes of middle to high-income households. Policies such as the benefit cap, two-child limit and the uprating of benefits by less than inflation or not at all (in combination with tax policies that benefitted low-income households) reduced the incomes of the poorest 20 per cent of households by £1,900, or 10 per cent.
Levels of relative poverty have stayed pretty similar since 2009-10. But the make-up of the groups of people in poverty has changed, especially in regards to child poverty. The number of children in large families living in poverty has risen by 840,000, while it has fallen by 270,000 and 120,000 among families with one or two children respectively. This suggests that policies such as the two-child limit, which affects larger families, are having a direct impact on levels of child poverty.
It is clear that progress over the last 14 years on living standards has left much to be desired. It’s true that the Covid-19 pandemic and the cost-of-living crisis were external shocks that made it hard to improve the economy and boost living standards. But productivity growth has also been poor over the period, and governments can take steps to boost productivity, and make sure gains from higher productivity are shared out fairly. The new government must make sure they take big steps to boost living standards and share the gains from growth, so everyone in the UK can experience shared prosperity.
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This article is featured in our 14 August newsletter.
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