'Living standards in UK are slowly rising but the poorest are thousands of pounds worse off'

People march through the streets of Dublin to protest against increases in the cost of living. The protest was organised by the 'Cost of Living Coalition' which is made up of 30 organisations including trade unionists, student and pensioner bodies and opposition political parties. Picture date: Saturday September 24, 2022.
Credit: PA

Things are finally looking up.

The headline rate of inflation has eased and pay is rising faster than prices once again.

The strength of pay growth is causing the Bank of England (BoE) some anxiety, but the chancellor won't be fretting. 

The National Institute of Economic and Social Research (NIESR) calculates that living standards are set to rise by 1.9% during 2024 - an election year.

But NIESR's analysis also illustrates how much lost ground there is still to make up. 

Since 2020, the combined economic shocks of the pandemic, Russia's invasion of Ukraine and Brexit have left almost everyone in the UK feeling worse off, despite the billions of pounds the government has spent supporting households. 

Some people have been hit harder than others. 

NIESR calculates that the living standards of the 12 million households in the lowest half of the income distribution in Britain will be between seven and 20% lower in 2024/25, relative to 2019/20.

And NIESR predicts the living standards of these households won't return to pre-Covid levels until the end of 2027.

The brunt of the financial burden has been felt by the poorest households, Adrian Pabst, Deputy Director of NIESR, told ITV News

"The brunt of the hit has fallen on the poorest 50%," says Adrian Pabst, Deputy Director of NIESR.

"People earning either up to £16,000 a year or anywhere up to £41,000, have taken a much bigger hit because they're spending a higher proportion of their income on things that are really expensive, like energy, food, housing. And the [taxpayer] help that's happened has been important to cushion some of that impact, but it's not compensated for all of it."

The poorest 10% of people lost 10% of their disposable income. Credit: Supplied

According to NIESR, the fall in "real" (adjusted for inflation) post-tax, disposable incomes of the poorest 10% of UK households since 2019/20 amounts to approximately £4,500 a year (in current prices). 

The spending power of these 2.8 million households is lower than it would have been, in part because many are not in employment, relying instead on income from benefits which has not kept pace with the cost of living.

The government's decision to increase the National Living Wage by almost 10% from April and the recent cut to National Insurance will have limited impact on their prospects.

By contrast, NIESR's analysis show that the fortunes of higher income households in the UK have improved more quickly.

Many of the households in the top half of the income distribution are employed in sectors of the economy where earnings growth has been stronger and/or where bonuses have been paid.

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Others have sources of unearned income, like interest from savings or dividends from shares.

NIESR's analysis supports the prime minister's view, articulated yesterday, that the financial pressure on households is "starting to ease" as energy bills and mortgage rates fall.But it also highlights the difficulties that many households still face. 

This month, eight million people on means-tested benefits will receive their final cost-of-living payments, as the last of the temporary, "emergency" taxpayer support falls away. 

The chancellor has already made it clear that he would like to cut taxes in his Budget next month

Like the International Monetary Fund (IMF), NIESR takes the view that there are more urgent priorities, but it says that if Jeremy Hunt is determined to proceed then he should be lowering the tax burden for those who are most in need of support.

"The chancellor should not be abolishing inheritance tax, and he also shouldn't just be cutting income tax because that helps high income households much more than the low income households," says Mr Pabst.

"To help those in the bottom half of the income distribution, the best thing to do is to raise the income tax threshold [from £12,275] because that means you start paying tax later and you keep more of your own money."

Whatever happens in the Budget, there is no quick fix for the UK's economic problems, which pre-date the arrival of Covid in 2020. 

The main issue is that for the best part of a generation, Britain's economy has been struck in a low-growth rut.

Economic growth makes everything feel better: unemployment falls, government debt becomes more sustainable, money is freed up to fund public services and, most importantly, living standards rise.

Productivity is the Holy Grail. To raise growth, and with it living standards, we need to find a way of working more efficiently, of increasing the amount of goods and services the typical British worker produces each hour.

No political parties have explained how they will increase productivity, Mr Pabst said

An election looms, but Mr Pabst says none of the main political parties have a compelling strategy to revive productivity and with it our prosperity.

"[All politicians are] committed to higher growth. Everyone wants to increase productivity. No one has told us how to do it," Pabst told ITV News. 

"Frankly at the moment, it's not clear who's got ideas to fix Britain's problems. It is a huge concern because the problems are very deep. The British people deserve better than just the slogans they're currently getting from the parties," he added.

A Treasury spokesperson told ITV News: “As this report acknowledges, the UK economy is beginning to turn a corner thanks to the decisive action we’ve taken to tackle high inflation. 

“But we know the job isn’t done, which is why we’ve supported households with £3,700 between 2022 and 2025.

"Wages have been rising faster than prices for the last five months, millions of low-paid workers will get a record increase through the National Living Wage from April and the average worker will save £450 this year thanks to our National Insurance cut last month.” 

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