Comparing the UK with the US. Is the UK trapped in a doom loop?

 

1.         The Problem

 

That the UK is trapped in a doom loop while the income of the US races away from that of the UK is a widely perceived perception of the two countries. The left and the right are both clear on the nature of the problem and have their radically different solutions. The left sees the problem as one where the current labour government continues what are usually described as neoliberal policies. These can be summarised as a belief in markets and the importance of fiscal responsibility as illustrated by the chancellor’s stress on meeting the fiscal rules she set out. The right, in contrast, sees that the increases in government expenditure on welfare make meeting the fiscal rules possible only by increasing taxes. Such increases in taxes reduce growth. Further the right sees the labour government as passing laws which will damage the housing rental market and the labour market, further limiting growth.

 From their very different policy perspectives both are agreed that Britain is trapped in a doom loop. On the left the fiscal rules prevent expenditure necessary for growth and poverty reduction. On the right the doom loop is of higher taxes, lower growth and lower living standards. The perception among the public that both of the main political parties have failed, in quick succession, to provide higher incomes and better public services has fuelled the rise of parties to both their right and left.

 The success of the US relative to the UK is seen as evidence, by the right, that a low tax, low regulated economy can grow much faster than the higher taxed, highly regulated economy of the UK. But is this view, of the relative success of the US economy, correct? In this blog I want to discuss a paper which offers a very different perspective to those of the right and the left outlined above:

 ‘The UK Productivity “Puzzle” in an international comparative perspective’. John Fernal and Robert Inklaar, Oxford Bulletin of Economics and Statistics, 2025.

 I am going to present similar data to that used in their paper. Their conclusion is that what explains the performance of the UK economy compared with that of the US is, in large part, their very different rates of Total Factor Productivity (TFP) growth after the financial crisis. In the final part of the blog I will argue that political debate about the problems of the UK economy not only does not address the real problems, but focuses on policies that will make the problems worse.

 I begin by explaining Total Factor Productivity (TFP) and why it is of central importance for understanding the causes of growth in an economy.

 2.         The size of an economy, sources of growth and TFP

 In seeking to understand why economies are of very different economic size we need to focus on two factors. The first is how large is the population and its labour force. The second is the amount of capital in the economy, that is the amount of buildings, infrastructure, machinery, indeed any capital equipment that produces output. We need to include in our measure of capital the skills of the workforce as those skills too increase output.

 However, we are not simply interested in the size of the economy. We are interested in how well off are the people in any country. Simplifying rather, how rich people are in an economy depends on two factors. The first is the amount of capital relative to labour – which we term the capital labour ratio – the second is how efficiently this capital and labour is used. What the data shows is that countries with the same amounts of capital and labour can have very different levels of output. That is what we mean when we talk about the efficiency with which labour and capital are used. The name we give to this measure is Total Factor Productivity (TFP). It is a measure of how much more output we get for any given level of labour and capital.

 In summary, the economic size of an economy depends on the levels of labour and capital and TFP. How much income per person is available to an economy depends of the amounts of capital relative to labour and the level of TFP. Finally, how fast income per person grows depends of how fast the capital to labour ratio rises and how fast TFP grows. In the sections that follows we show data for all these aspects of both the US and the UK economies.

 3.         What explains the performance of the UK economy relative to the US?

 We begin at the end of our story, namely how the growth rates of the UK and US economies have compared since 1950. In the left-hand part of Figure 1 we show the annual growth rate of the two countries since 1950 in the periods I used in my book The Poor and the Plutocrats where the data ended in 2007.

 Two key facts emerge from Figure 1. The first is that the trend growth rate of both economies in the period from 1950 to 2007 was identical at 2.2 per cent per annum. The second is that in the period after the financial crisis of 2007 the growth rate of both the US and the UK economies dropped markedly. What has been the focus of public concern is that in the UK the trend growth rate declined from 2.2% per annum to 0.7% per annum.

 

In Figure 2 we look at what these growth rates imply about the levels of GDP in 2007, that is the start of the financial crisis, and 2023, the most recent year for which we have data. As we know the UK is a much smaller economy than that of the US due in part to the much higher population of the US. The relative sizes are shown in the left-hand part of Figure 2. What is striking is that the difference in size grew markedly. In 2007 the US economy was six times that of the UK. By 2023 it was seven times bigger.

The right-hand part of Figures 2 shows the incomes per capita. Here too the gap between the economies grew. In 2007 the US income per capita was 5 per cent higher than that of the UK, by 2007 its was 22 per cent higher. Thus, in terms of both income and income per capita the US economy has outperformed that of the UK since the financial crisis. How and why? The how part of that question is answered in Figures 3 and 4.

 Figure 3 shows the growth of labour and capital services. Figure 4 in its left-hand chart shows the effects of this growth in labour and capital services, that is changes in the capital labour ratio. We outlined in section 2 above the size of the capital labour ratio plays in determining how productive are workers in an economy. Before turning to that in Figure 4 note in Figure 3 how different are the US and the UK in the growth of labour services. In the period prior to 2007 the growth of labour services in the US was far higher than in the UK, in large part due to immigration. It is this higher rate of growth in labour services that explains the higher growth in the size of the US economy relative to the UK.

 

While Figure 3 is relevant for understanding the growth in the size of the economy it is Figure 4 which is crucial for understanding how incomes per capita have grown and why growth in the UK economy has been so much lower than that in the US. The figure also shows that the factor that matters most for these differences in growth rates is TFP. While in the period before 2007 the trend growths rates in the two economies were the same at 1.2%pa after 2007 the growth rate of TFP in the UK collapsed relative to that of the US. While, as Figure 4 shows, the trend growth rate in the capital labour ratio was lower in the UK than the US the differences were much smaller than those shown for TFP.

 

4.         A doom loop for the UK

 The answer to the question - Is the US a more successful economy than the UK?  - is, in general, no. It is true that since the financial crisis its GDP growth rate has been higher but in the period from 1950 to the financial crisis the trend growth rates were identical.

 The implication of these conclusions is that the policy perceptions on both the left and the right in the UK, that Britain is trapped in a doom loop, is simply wrong. More government expenditure, the recipe of the left, or lower taxes, the recipe of the right, are only relevant if they can be shown to impact either TFP or the capital labour ratio. It is though possible the UK is trapped in a doom loop, one where the populist calls for lower immigration and policies undermining investment in skills, particularly the universities, do lead to a continuing failure to address what actually matters for increasing the growth rate of incomes in the economy, namely TFP and the capital labour ratio.

 

 

 

 

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How does the wealth of the poor in Great Britain compare with that in the US?

 

In my last blog I showed how, while the concentration of wealth at the top of the distribution was similar in both the UK and the US, wealth was vastly higher in the US than in the UK. It is often argued, in defence of these very high levels of wealth, that such wealth in the long run benefits all in terms of the jobs and incomes it creates. As I showed in that blog the wealth in the US has been growing far faster than in the UK. So how have the poor fared in both countries in terms, at least, of their wealth?

 In this blog I am going to use two data sources to answer that question. For the US I use the Federal Reserve's data on household wealth, which is primarily from the Financial Accounts of the United States and the Survey of Consumer Finances (SCF). For the UK I use ONS data for total wealth in Great Britain. From both data sources it is possible to derive information on net worth which is the value of total assets less liabilities. The most recent data from the ONS is for 2022 so I provide a comparison across the US and Great Britain for that year.

 While both data sources provide information of net worth across households they do not do so on a similar basis. So that we can compare directly I use a common basis, which consists of three categories – the top 10 per cent, those if the 60^th to 90^th deciles and the bottom 50 per cent. I present the average net worth for these three categories in a common currency which is purchasing power US$.

 Figure 1 below shows the result of this comparison As we would anticipate the top 10 per cent in the US are far richer than the top 10 per cent in Great Britain, about twice as rich on average. What might surprise is that the bottom 50 per cent are far richer in Great Britain than the bottom 50 per cent in the US, about three times richer. It is also the case for those in the 60^th to 90^th percentile that wealth is higher in Great Britain than in the US, although the difference here is only some 13 per cent.

 

In summary when comparing average household wealth in the US with that in Great Britain the bottom 90 per cent in Great Britian have higher average household wealth than the bottom 90 per cent in the US when we do this comparison for 2022. Table 1 below gives the data that underlies the averages shown in Figure 1.

Table1 Net Worth in the US and Great Britain in 2022

 Total Wealth and Wealth per Household in the US

	Total Wealth In trillions US$	Number of households In millions	Wealth per household  in US$
Bottom 50 per cent	3.55	65.601	54,000
Next forty	42.3	52.481	806,000
Top 10 per cent	90.5	13.120	6,898,000
Totals	136.4	131.2	7,758,000
Source: US Federal Reserve Board Data

 

 Table 1 provides the data for both total wealth and per household wealth for the US and Great Britain for the year 2022, which is the most recent year for which a direct comparison is possible. Total wealth is much higher in the US at 136.4 trillion dollars as compared with 13.6 trillion for Great Britain, a ten-fold difference. This, of course, is partly accounted for by the much larger size of the US economy with 131 thousand households compared with 24.7 thousand for Britain. There remain large differences across the economies when we look, in the final column of the Table, at wealth per household. This at US$ 7,758,000 is some nine times higher than the level in Britain at US$ (PPP) 835,916.

It is when we look at the breakdown by the deciles of the population we see how, for some 90 per cent of the population, wealth is higher in Great Britain than in the US. In the case of the bottom 50 per cent wealth is some three times higher in Great Britain than in the US as we have shown in Figure 1. We asked in the title for this blog ‘How does the wealth of the poor in Great Britain compare with that in the US?’ The answer is that it compares very well and looking at overall averages is very misleading.

 

Do you really want to get rid of the uber rich?

 

The uber-rich are both conspicuous and increasing in number. In this blog I am going to show one way it should be possible to reduce their number. Before doing that, we need to understand where they come from and why both their number and wealth is increasing.

I begin with the Forbes rich list for 2001 and 2024. This list seeks to rank billionaires from the richest to the ‘poorest’.  Forbes identifies 335 billionaires in 2001 with an average wealth of US$ 6.4 billion (in 2024 prices) and 2,781 billionaires for 2024 with an average wealth of US$ 5.1 billion. In 2004 the billionaire wealth ranged from US$ 233 billion to US$1 billion, this being the cut-off point to get into the Forbes rich list. In Figure 1 I show a histogram of the distribution of these billionaires.

Figure 1 

The height of the bars in a histogram tells you how often different billionaires appear in the data. So, the fact that the highest bar is for the lowest level of the net worth of billionaires tells you that across the distribution shown in Figure 1 billionaires with less than US$1.5 billion are the most common type of billionaires. Now clearly having a net worth of US$1.5 billion is a very rich person by any usual standards. However, within the class of billionaires, there are those who are very much richer.  In 2024 the four richest billionaires have wealth of US$ 177, 194,195 and 233 billion respectively, over 100 times the level of wealth of most of the billionaire class. We can see this in the pattern of the histogram shown in Figure 1. Those with net worth greater than about US$30 billion are nearly invisible on the chart.

There are two other implications we can draw from Figure 1. The first is that the average of wealth across the distribution is a misleading statistic as it is influenced by these very few very high wealth individuals. A better measure is the median which is the level of wealth by which 50 per cent have higher wealth and 50 per cent lower wealth. For 2001 the median wealth of the billionaires was US$ 3.7 billion and in 2024 the median value of wealth was US$ 2.4 billion, some 30 per cent lower than the 2001 number. Both year use 2024 prices.

The second implication we can draw from Figure 1 is that wealth within the billionaires in the data is becoming more unequally distributed. It is how wealth is distributed among the very wealthy that produces the uber wealthy. We can see these uber wealthy in Figure 2 which uses data from the World Inequality Dataset.

To find the uber wealthy we need to look not in the top 1 per cent or even the top 0.1 per cent but (at least nearly) into the top 0.007 per cent. Within this last category we have average wealth in the US of US$ 600 million, close at least to the billionaires in our Forbes data. For the UK the average wealth for this last category is just under US$ (ppp) 150 million. For the UK, even at his point, we are a long way from the Forbes billionaires, reflecting just how few there are of them in the UK compared with the US.

In Figure 2 we compare the US and the US in 2023. In Figure 3 we ask how wealth among the very wealthy has increased in both countries. Our data, which is all from the World Inequality Dataset, enables us to see a longer run of data for the US than for the UK. For both countries since the mid-1990s there was been a significant increase in average wealth among the top 1 per cent but more particularly among the top 0.1 per cent. Again, both the level and the increase in wealth has been much greater for the US than for the UK.

The key points that emerges from Figures 2 and 3 is that not only are the uber wealthy a tiny fraction of the top 10 percent but that this wealth is vastly greater in the US than the UK and has been increasing much faster in the US than in the UK. So, we have three questions to which we need answers:

(1) Why is wealth, among the wealthy, so concentrated? 

(2) Why are the wealthy in the US so much wealthier than the wealthy in the UK? 

(3) Why have the wealthy been getting richer so much faster in the US than the UK?

The possible answer to the first of these questions is in the nature of winners in the task of accumulating wealth. If the opportunities to acquire wealth were evenly spread and open to all we would expect to see a rising tide of the wealthy. That is not what we observe at all. We observe a few speculatively successful individuals who come to occupy the top of the top of the distribution.

The answer to our second and third questions is that, at least in the recent past, the US has been greatly more successful that the UK in generating wealth creating opportunities.

So, considering the question posed by this blog - Do you really want to get rid of the uber rich? – one answer may be to make your economy more like the UK than the US.

 

Taxing the rich in Britain

 

A famous quote attributed to F. Scott Fitzgerald about the wealthy is: "Let me tell you about the very rich. They are different from you and me." Ernest Hemingway is said to have retorted, "Yes, they have more money".

 So, how much money do the wealthy currently have in Britain. This question has become a more sensitive one after more than a decade of stagnant living standards for most.

 The guardian reports that “A modest wealth tax aimed at the ultra-rich, for example those with assets over £10m, could generate significant funds. One study suggests a global levy on the top 0.5% could raise about $2.1tn – roughly 7% of national budgets – with the UK alone bringing in around $31bn a year. That revenue could be transformative if used to fund the NHS, education, affordable housing, climate resilience, and long-term care.”

 In this blog I am going to use three sources of data to show how many are rich and just how rich they are and if taxing them is the solution to Britain’s tax problems. The first is data from Forbes on how many billionaires there are in the world. The second is ONS data on aggregate household total wealth. The third is data from the World Inequality Dataset (WID) which is a global comparative dataset organised by Facundo Alvaredo, Anthony B. Atkinson, Thomas Piketty, Emmanuel Saez, and Gabriel Zucmaninitially.

As the most recent data from the ONS, which gives us a breakdown of wealth across the population of Great Britain, is for 2022 I am going to use data for 2022 from the Forbes list of billionaires and also data from WID for 2022. Forbes shows that in 2022 there were 88 billionaires in the United Kingdom whose wealth ranged from $US 32.5 billion to $US1 billion. The average wealth for these billionaires was $US4.5 billion and the median value was US$2.6 billion. The median value is the one for which half those in the data are above the value and half are below Their total wealth was $US 400.1 billion. In 2020 the US$ to pound exchange rate was 1.5, so in pounds these numbers translate to a range of wealth from £21.6 billion to £0.6 billion and a total wealth of £266.7 billion. Figure 1 shows the distribution of this wealth across percentiles. 

Figure 1

 

In order to compare these very rich individuals with the other wealthy people in the UK we need to use the ONS data. The ONS provide us with total household wealth by decile, ie from the poorest 10 per cent to the riches 10 per cent. These are total numbers. To obtain an estimate of the wealth per individual adult, to compare with our Forbes numbers, we need to make assumptions about numbers of households and number of adults in a household and this I do in Table 1. So, in Table 1 the first column, from the ONS, is for aggregate total wealth in millions of pounds divided between the poorest decile with total wealth of £13, 897 million to the richest decile with total wealth of £5,523,204 million and total wealth, across all deciles of £13,567,890 million. Such large numbers are hard to understand so the Table provides estimates of wealth per household in column (3) and wealth per adult in columns (6).

 The differences across deciles are dramatic, the poorest decile have £4,165 per adult and the richest decile has £1,655,289 per adult, a scarcely credible nearly 400 times difference. It is these differences that are often cited with the implicit implication that here is a large potential tax basis for a wealth tax.

 Table 1 ONS Data 

Before we try and assess how much a wealth tax could raise, we need to investigate how wealth is divided up within the top 10 per cent. Notice from the ONS data in Table 1 while the average wealth per adult is estimated to be £1.7 million, which is vastly greater than the rest, it is far from the billions we read from the Forbes data. It is also far from the £10 million level suggested as the basis for a wealth tax in the Guardian report cited at the beginning of this blog.

 In Table 2 I use the WID data to investigate how incomes are divided up within the top 10 per cent. The WID data provides us not only with the average wealth but also the threshold level (ie how much wealth you need to enter the relevant percentile) and also the share of wealth held by the top shares of wealth.

 From the Table we see not only the inequality of wealth but how it is distributed within the top 10 per cent. The WID data show that to enter the 10 per cent of wealth holder you need £ 613,000 and that the share of the top 10 per cent is 57.1 per cent. This is higher than that implied by the data in Table 1. The WID data also how much wealth varies within the top 10 per cent. We see from Table 2 that the average wealth of the top 1 per cent is £5.61 million, that of the top 0.1 per cent £17.84 million. Table 2 also shows the average wealth for the top 0.007 per cent which at £111.9 million is some 74 times the average.

Figure 2 presents the distribution of wealth within the top 10 per cent in a similar way to how we presented that for billionaires in Figure 1. While the numbers are very different the pattern is the same, with the very richest far richer than most.

Figure 2

So, next back to our wealth tax. Taking the top 0.1 per cent as the “rich” who will be taxed we have 28,300 households with average wealth of £17.84 million so a tax base of £504,872 million. A 1 per cent tax would raise £5,048 million. In 2023/24, UK government raised around £1,099 billion (£1.1 trillion) in receipts – income from taxes and other sources. So, 1 per cent tax on the top 0.1 per cent would raise a tiny fraction of current total revenues.

The problem this analysis highlights is that while there are indeed very rich individuals, they are too few to provide a feasible basis for raising substantial tax revenue. Finally, you might ask where are the billionaires in Figure 2. Even the richest individuals in the WID data have an average wealth of about 70 million, far from the billionaires shown in Figure 1. The billionaires would only in Figure 2 if we could extend the data even further up the wealth distribution. They are too few to appear. This simply emphasises our essential point. There are not enough of the wealthy to provide a good basis for taxation.

What explains the problems the Labour government faces?

  

The Labour government is clearly in deep trouble. In this blog I want to argue that the problems are ones that have a long history but can be solved. The basic problem is that since the 1970s there has not been enough investment in the economy. While the low levels of investment have often been given as a problem facing the economy I want to argue it is the problem. How this problem has affected almost every aspect of what the labour government wants so achieve will be the focus of this blog.

The labour government came to office promising growth. The reason for the promise was obvious. Without growth the rise in public sector spending, which the economy obviously required, would need higher taxes. Having promised that it will not increase national insurance, the basic, higher or additional rates of income tax, or VAT (the three biggest revenue-generating taxes) the government was stuck. Initially Rachel Reeves raised national insurance on firms finessing the manifesto promise on national insurance by refocusing the commitment as not taxing working people. By the middle of 2025 it was widely assumed that further tax rises would be required and how the promised growth was to be achieved was not explained.

To increase the size of an economy requires both more labour and more capital. The ONS has produced data that enables us to measure the total increase of labour and capital to the market sector of the economy. (A note on this data is at the end of this blog). In Figure 1 I show the annual percentage changes of labour and capital services from 1970 to 2024. The red line in the charts is the trend of the growth rate. We see dramatic differences. While there is a modest upward trend in the growth rate of labour services there is a much more pronounced downwards trend in the growth rate of capital services. In the figure I also show average growth rates, for the whole period from 1970 to 2024 and before and after the financial crisis of 2008 and 2009.

Again, the ONS data enables us to measure both these aspect of the determinants of growth per person and we show how their growth rate has varied since the 1970s in Figure 2 and before and after the financial crisis. The left-hand part of Figure 2 shows the growth rates of the capital labour ratio. As we would anticipate from Figure 1 with a rising growth rate of labour and a falling growth rate for capital the result is a rapid decline in the growth rate of the capital labour ratio. There is also a decline in the rate of growth of total factor productivity. Notice that when we get to 2024, ie the year Labour was elected, the growth rate both of the capital labour ratio and total factor productivity is negative.

We can now show how the growth of capital and labour has changed output (the left-hand part of Figure 3) and how output per person has changed (the right-hand part of Figure 3). As we can see from the right-hand side of Figure 3 the long run decline in the growth rate of output per person has given us a negative growth rate by 2024.    

 

It is important not to conclude from these figures that the red line tells us that there has been a steady decline in the rate of growth of output per person. It is probable that the financial crisis of 2008 to 2009 was followed by a step down in the growth for output per person, and the factors determining it shown in Figure 2.

 Finally, we look out at how closely linked are capital labour ratios and total factor productivity to the growth of output per person in Figure 4.

Any view as to how economies grow in the long term must focus on both the extent of investment which ensures rises in the capital stock and factors that determine TFP. The latter are complex and in large part unknown. So, the focus of policy needs to be on how investment can be increased. While the rhetoric of government may focus on growth it is less clear that the means to attain it are understood.

A note on the data

The data used in this blog are ONS data to measure capital deepening and TFP by market sector. They are described as ‘Official Statistics in development’. The ONS notes say that the dataset used contains experimental estimates of growth accounting statistics for the UK market sector. Data for the market sector which is used in this blog ‘includes all industries whose products have an economically significant price. This excludes central and local government, non-profit institutions serving households, and imputed rental. The latter is an estimate of the housing services consumed by households who are not actually renting their residence. Its inclusion in the National Accounts ensures the valuation of housing services is calculated on a consistent basis over time and between countries.’

 

What explains the current crisis in UK living standards?

 

      

 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.

 

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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.