Good morning from New Economy Brief. 

We’re about to see the largest reduction in living standards since records began. That was the verdict of the Office for Budget Responsibility (OBR) following the Chancellor’s Autumn Statement last month (see our take on it here). Jeremy Hunt may think this is unfair, having increased the minimum wage to £11.44 per hour, technically an above-inflation rise, but real weekly average wages are still expected to remain below 2008 levels until 2028. Meanwhile, years of social security cuts have reduced the incomes of the poorest fifth of the population by just under £3,000 since 2010. This isn’t a case of fixing a recent cost of living crisis, but years and years of stagnation and cuts. Living standards haven’t been collapsing for two years, but for 20.

So what’s going on here? And what can be done about it? A new report by the Resolution Foundation and the Centre for Economic Performance, Ending Stagnation, outlines a new economic strategy for Britain. It highlights, among other things, the economic impact of high inequality and falling living standards, and the policies solutions available. 

This week, we explore how far UK living standards have fallen and the options available to raise them.

The long cost of living crisis. The invasion of Ukraine marked the start of what we now call the cost of living crisis, with shocks in international markets – particularly energy – causing prices to skyrocket. However, it is widely accepted that this crisis wasn’t the beginning of the issue – simply another layer on top of the UK’s already serious living standards problem. Small increases in real wages over recent months, and the latest boost to the minimum wage, come after years of real-terms cuts to public sector pay and stagnant wages across the economy. Meanwhile, the recent uprating of working-age benefits in line with September’s inflation rate fails to make up for the decade in which benefits usually lagged behind inflation. According to the Resolution Foundation, almost 9 million younger Brits have never worked in an economy with sustained rising average wages. Falling living standards, for some sections of the population, have become the norm. 

  • How does Britain compare to its peers? The Resolution Foundation argues that when it comes to living standards, it is “simply no longer true” that the UK is on a par with countries like France and Germany. Middle-income Brits are now 20 per cent poorer than their peers in Germany and 9 per cent poorer than those in France. For low-income households, that gap is now around 27 per cent. 
  • A toxic combination. Politicians of all stripes are keen to demonstrate how they would tackle what is seen as the key economic issue of modern Britain: growth - or the lack of it, to be precise. But for the authors of this report, the problem of low growth comes hand in hand with high inequality. They argue that these twin challenges, each a substantial issue in its own right, together form a “toxic combination”. Slow growth becomes even more dangerous when so many of us lack financial resilience. 

What does a strategy for living standards look like? The Resolution Foundation and Centre for Economic Performance argue that we must be “as hard-headed about lower inequality as higher growth”. They suggest a two-pronged approach: putting “good work” at the heart of any economic strategy, “not a hoped-for byproduct of it”, and making sure that “choices on tax and benefits ensure rewards and sacrifices are equitably shared”. 

  • Good work. So what does ‘good work’ mean, exactly? It seems almost too obvious to mention, but one sure way of improving living standards is to increase the amount of money that people earn. The report calls for the minimum wage to reach 73 per cent of median pay (£14 on current forecasts) by 2029. It also calls for sectoral ‘Good Work Agreements’ to set minimum standards and ways of working. 
  • Not just work. As we saw with this year’s Autumn Statement, raising the minimum wage alone is not enough to improve living standards. After years of social security cuts, our benefits system is now woefully inadequate. According to the Joseph Rowntree Foundation, nearly three-quarters of those in destitution are receiving social security payments of some kind. As the Ending Stagnation report notes, benefits have failed to keep pace with prices in 10 of the past 15 years. Its solution? To increase benefits in line with wages, not prices. It argues that this will reconnect the incomes of poorer households with those of the rest of the population, and that evidence from New Zealand and Germany shows that concerns that this will reduce incentives to work are “overdone”. 
  • Housing. With housing such a huge squeeze on budgets, the report calls for higher housing supply, higher standards in the private rented sector and greater housing benefit support. It argues that relinking housing support to rent levels will “lean against inequality and facilitate mobility”.
  • “Better, not just higher, taxes”. The paper argues that while taxes are up, their “quality” is not. It suggests that taxes fall “disproportionately on employees” and that wealth must “take more of the strain”. This could include council tax reforms as well as more effective inheritance tax with fewer loopholes to make it harder for the “well advised to abuse”.

Growth may be the topic of the day in Westminster, but none of the major parties will be able to achieve it without a proper strategy for living standards. The average UK family no longer enjoys the same quality of life as in comparable countries, with an increasing number unable to afford the very basics. This is a severe crisis, but it is not a new one. The living standards crisis has been brewing for decades, long before the double-digit inflation figures of recent months. Given this, the government’s current cost of living strategy – focusing purely on trying to reduce inflation – is misguided. Hitting the 2% inflation target will not end a decade-long stagnation in living standards. But this report is a reminder that policy debates too often confuse cause and effect. Higher wages, decent social security, strong public services, affordable housing and a fairer tax system are not just products we can hope for from a healthier economy – they are the vital ingredients to create it.

Weekly Updates

Climate change and inequality

Double Jeopardy. Low–income countries face the twin challenge of responding to the impacts of climate change and to income inequality, argues UCL’s Marianna Mazzucato in the Guardian. Pointing out that these countries spend significantly more financing their debt than they can afford to spend on climate adaptation, Mazzucato argues that the challenge for COP is “how do we actually find ways for them to be able to tackle these climate challenges which have been caused by the north in such a way not to [push them] further into this debt spiral?”

Climate/food spiral. The impact of climate change and rising energy prices has added £605 to the average food bill for 2022 and 2023, according to new analysis from ECIU. Interestingly most (60%) of this came from climate effects rather than energy costs, and as ECIU points out “climate change exerts a more persistent effect on food prices” than fluctuating fuel costs.

COP Health Day. “The climate crisis is fundamentally a health crisis” argues Fernanda Balata in a new blog for the New Economics Foundation (NEF). As the COP climate conference held its first ever ‘health day’, Balata argues that it is a ‘long-time-coming opportunity to put health more firmly on the climate agenda”.

Industrial strategy

Productivity plea. “Productivity-enhancing policies” need to to be introduced “sooner rather than later” to arrest the UK’s economic decline, according to Professors Diane Coyle and Bart van Ark writing to launch a chunky new report from the Productivity Commission. Covering everything from investment levels to AI skills, the report argues that “the UK’s dismal productivity requires an urgent and comprehensive policy agenda”.

Public services

Childcare crisis. The Government’s pledge to expand free childcare is “doomed to fail” because of a staffing crisis in the childcare sector, according to an investigation by the Independent. Research from the Early Education and Childcare Coalition and University of Leeds found that 100,000 extra workers are needed to deliver the pledge, while the newspaper finds that nurseries are closing “amid a spiralling cost of living crisis and lack of government support”.