How Are UK Living Standards Faring Ahead of the General Election?

How have living standards evolved since the previous election in December 2019?

Since Covid-19 and the cost-of-living crisis, there has been a vibrant debate about the evolution of living standards among both researchers and policymakers. In our May 2024 Outlook for the UK economy, we found that aggregate real personal disposable income rose by 2.2 per cent in 2023 and is projected to rise by 2.8 per cent in 2024. However, the costs related to housing (rents and mortgage rates) have also increased significantly, wiping out the gains from real wage growth.

To reflect this, we use equivalised household real disposable income (eHRDI) as a measure of living standards, which is real personal disposable income adjusted for household composition and after housing costs. Using this measure, we find that living standards have on average fallen by 7 per cent since the previous election in December 2019.

Households in the bottom half of the income distribution have borne the brunt of this fall, with the households in the lowest income decile facing an income shortfall of some £4,600 in 2024-25 compared with December 2019 levels.

What are the key drivers of this fall in living standards?

High inflation and rising interest rates since 2022 have placed a high cost-of-living burden upon households in the bottom half of the population. This hit to household finances accounted for 10 percentage points or more of the 20 per cent reduction in eHRDI for the bottom half of the population of households.

During the period since 2022, direct state support in the form of Cost-of-Living Payments, Energy Bills support and the Energy Price Guarantee acted to mitigate part of this additional cost-of-living hit. However, this accounted for only £2,000 of the hit to household finances on average, and much lower for the ‘squeezed middle’ of households in income deciles 3-7.

Households in the top two income deciles received £2,400-£3,700 while households in the ‘squeezed middle’ (deciles 3-5) received about £1,450. In an era of constrained government finances, the lack of targeted welfare support is unfair and inefficient. The Energy Price Guarantee was particularly regressive and failed to incentivise efficient energy use in line with stated national net zero ambitions.

How can policy help boost living standards?

Faced with external shocks such as Covid-19 or the spike in inflation following Russia’s invasion of Ukraine, welfare is key in the short-term. Our work shows that the Universal Credit uplift during the pandemic was vital to help the poorest households, as were the Cost-of-Living Payments, worth some £900 during the worst of the crisis.

Another effective way of supporting low-income households is to raise the National Minimum Wage and the National Living Wage, which went up by some 10 per cent in April 2023 and again in April this year. We find households in the bottom income decile (with a disposable income of up to £15,500 per year) would see a 5-6 per cent rise in their consumption in 2023-24, as a result of the increased NMW and NLW rates. Higher wages will also encourage some poor people into work, with projected falls in both inactivity and unemployment of about 2 percentage points in the second bottom decile, that is, households with a disposable income of up to £26,000 per year.

By contrast, tax cuts are generally speaking not the best way to help boost the living standards of those households who have been hit hardest by the recent shocks. The 2-percentage point cut to National Insurance Contributions that came into effect in January 2024 and again in April 2024 was welcome news for low-income households, but the impact was regressive in that higher-income households benefitted disproportionately. A more effective strategy is to raise the personal allowance, which has been frozen at £12,570 since 2021, in line with wage growth. Such an increase will help households in the lower income deciles to keep a larger proportion of their gross income and keep up with rising prices.