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.