It is no secret that voters are
dissatisfied with the performance of politicians in improving their living
standards. One well known aspect of this dissatisfaction is the failure of
hourly earnings to increase since the financial crisis of 2007-08. A fact
documented in previous blogs. In this blog I am going to look at how living
standards have changed under both conservative and labour government since the
arrival in Downing Street of Margaret Thatcher.
I start in Figures 1 and 2 showing
the differing outcomes for hourly earnings and household incomes. The dates
shown in the Figures delineate the periods of the different governments after
1979. These are first the Thatcher government from 1970 to 1991, the John Major
government from 1991 to 1997, New labour under Tony Blair and Gordon Brown from
1997 to 2010 and the period of coalition and conservative government after
2010. I include 2019 as the period before the Covid pandemic impacted all
aspects of the economy.
Figure
1 Real Hourly Earnings
Figure
2 Real Incomes
Sources:
ONS Data (for
details see end of blog)
The Thatcher governments saw a 40
per cent rise in real hourly earnings, just outstripping the rise of 37 per
cent under New Labour. These substantial increases stand in dramatic contrast
with the coalition and conservative governments after 2010. More than a decade
after David Cameron became prime minster real hourly earnings had not risen (see Figure 1). However, and less well known,
over this period of falling, or stagnant, hourly earnings real incomes from
work rose. Indeed, rose quite rapidly (see Figure 2).
In Figure 2 I present two measures of
household income that are provided by the ONS. The first termed in the Figure market
income is the incomes from employment and self-employment, pensions and
investment income and includes imputed income from benefits in kind. It is, in
the main, the incomes available from the market. The second is a measure of
disposable income. This differs from market income by the benefits that
households receive less the taxes they pay. In summary market income would be
incomes before the intervention of government acting to redistribute income
through, for example, employment and support allowances, incapacity benefits
and income support. The data in Figure 2 shows equivalised disposable income
where the term ‘equivalise’ refers to an adjustment made for household size. Cleary
an income for a single person household is not the same as for a family with
children.
As Figure 2 shows incomes from
work, market income, increased by 38 per cent from 2010 to 2022. This is
slightly higher than the increase for the previous decade. So why the
widespread dissatisfaction with living standards? The answer is also in Figure
2 which shows that between 1979, the advent of the first Thatcher government,
and 2010, the end of the New Labour government, real equivalised disposable
income doubled. In contrast, in the twelve years that followed real equivalised
disposable income increased by only some 9 per cent. This implies a dramatic
slowdown in the growth of equivalised disposable income.
What explains these very different
patterns for market and disposable incomes? One possible answer, also shown in
earlier blogs, is the dramatic rise in employment after 2010 - see Figure 3. Over
a period from the start of the financial crisis in 2007 and the start of Covid
in 2019, where these was no rise in real average earnings, the numbers in
employment increased from 29.2 million to 32.8 million. An increase in
employment of 3.6 million or a rise of some 12 percent. There was also an
increase in self-employment from 3.9 million to 4.7 million, a rise of 1.2
million more in self-employment an increase of 31 per cent
Figure
3 A Sustained Rise in Employment after the Financial Crisis
Source:
ONS Data
So, it is the rise in employment
with stagnant earnings which can explain the growth in market incomes. But what
explains the much lower growth in disposable incomes? The answer is shown in
Figures 4 and 5. Figure 4 shows the percentages of benefits and taxes to market
incomes. In Figure 5 the same data is
presented as the amounts of benefits and the amount of taxes and national
insurance contributions paid over the period since 1979 for the average
household.
Figure
4 Tax rates rising and benefits rates falling after 2010
Figure
5 Amount of taxes increase by 50% under Post 2010 governments
Sources
for Figures 4 and 5: ONS Data (for details see end of blog)
This rise in taxes paid by average
households is part of the story which explains the difference between market
and disposable income. As Figure 4 shows the tax percentage changed relatively
little from 1979 to 2015 fluctuating between 22 and 24 percent of market
incomes. Given the sustained rises in income over this period the implication
is for a substantial rise in the average tax paid by households shown in Figure
5. The rise in taxes paid after 2010
reflects the rising tax rates. However, the gap between market income and
disposable incomes was not only the effect of increases in the average tax
rate. Allied to this increase in taxes was the reduction in the benefits
percentages (details of these can be found below). In fact, in percentage terms
the fall in the benefits percentages was much greater than the increase in the
tax percentage.
So, we can now answer the question
as to what explains the current crisis in UK living standards. There are three
elements that underlie this crisis. The first, and most well know, is the
failure to real earnings to rise since 2010. The reasons for this were the
subject of my last blog. The second was the implied need to work more reflected
in large increases in employment. The third was increases in taxes and reduction
in benefits ensuring that disposable income rose much less than income from
work.
Surely an unbeatable formula for ensuing unhappiness with policy outcomes.
A note on ONS data on incomes and taxes
by decile
The basis for the data shown in
Figures 2, 4 and 5 is data from the ONS which provides a breakdown on incomes,
benefits and taxes by decile. First is data which the ONS call “Original”
income which is termed “Market” income in the Figures.
Market Income consists of:
Wages
and salaries
Imputed
income from benefits in kind
Self-employment
income
Private
pensions, annuities
Investment
income
Other income
This
differs from disposable income by the benefits that household receives less the
taxes they pay.
Benefits included in the ONS Data
which is simply termed benefits in Figure 4 and 5:
Jobseeker's Allowance
(contribution-based)
Jobseeker's Allowance
(income-based)
Employment and Support Allowance
Incapacity Benefit
Income Support
Statutory Maternity Pay/Allowance
Child Benefit
Tax credits
Housing Benefit
State Pension
Pension Credit
Widows' benefits
War pensions/War widows' pensions
Carer's Allowance
Attendance Allowance
Disability Living Allowance
Personal Independence Payment
Severe Disablement Allowance
Industrial Injury Disablement
Benefit
Student support
Other benefits
Total direct taxes:
Income Tax
National Insurance contributions
Student loan repayments
Council Tax and Northern Ireland
rates
less: Council Tax benefit/Rates
rebates
Disposable income:
In the Figures this is defined as
market income + Benefits - Direct taxes.
In the ONS data there are more
details but I have confined attention to the most important for the purposes of
showing how market incomes differ from disposable incomes.